Here’s why contributing the maximum amount – or as close as you can get — to your employer-sponsored plan is the best way to preserve your earnings:
These plans provide valuable tax breaks, in several ways.
Contributions to a 401(k), a 403(b), etc. are pre-tax/tax-deductible. The amount you put in will reduce your modified adjusted gross income (MAGI). That’s crucial to minimizing or avoiding the 3.8% net investment income tax. You pay less today, and get to keep more money to grow.
The money you contribute can grow without being taxed. These defined-benefit plans mean that you will pay no income tax on your savings until you take distributions.
These plans provide free money.
Your company may match some or all of your contributions, pre-tax.
If you can’t quite manage to contribute the maximum amount allowed, at least be sure to contribute enough to qualify for your company’s matching contribution. Many people don’t, and they lose out on what is essentially free money from your workplace.
Remember that the more you put in, the greater your gains through matching funds, interest and appreciation. Be savvy about your money. Compound interest is like getting a bonus that you didn’t expect. Don’t turn it down.
How much can I contribute?
If you are younger than 50 years old, in 2015 you can contribute a maximum of $18,000. If the rate at which you’re currently contributing won’t get you to that level, take a clear look at your finances and see if you could increase that rate during the year. The sooner you’re able to raise your contribution rate, the greater you can benefit from tax-deferred compounding. That can really add up by the time you’re ready to retire.
If you’re older than 50 by December 31, 2015, you can make up for some years when you weren’t able to contribute the ideal amount. So-called “catchup” contributions (up to $6,000 for 2015) can help you make up for lost time. Even if you’re on-track at this point, you should still take advantage of catchup contributions if you can. The more you contribute, the greater the power of tax-deferred compounding.
You probably have some questions about your specific situation. Call us! We will carefully go over your options, and present the best tax and retirement-saving strategies for you. Our goal is to help you make the smartest moves to ensure that your money grows to its fullest potential.