Studies have shown that the number of Americans who need to ramp up their retirement savings is huge. Many families are still recovering from economic downturns and saving is a struggle, even for people who are over 50 and know they should do more. There are certain tax breaks and, if you are lucky enough to work for a great company, employer contributions that can help grow your retirement savings in 2016.
US News explains how to take full advantage of the 401(k) and individual retirement account perks you're eligible for in 2016 in "How to Maximize Your Retirement Accounts in 2016."
Max out your 401(k). You can contribute up to $18,000 to your 401(k) plan in 2016, which means saving $1,500 per month. Income tax isn't due on this money until it is withdrawn from the account.
Make catch-up contributions. Workers age 50 and older can contribute an additional $6,000 to a 401(k) plan in 2016, for a total contribution of $24,000. Hitting this 401(k) limit would mean saving $2,000 per month. If you do that, you could reduce your tax bill by as much as $6,000 if you are in the 25% tax bracket and $8,400 if you pay a 35% federal income tax rate.
The employer match. If your company provides a 401(k) match up to 6% of pay, set up your withholding for at least that amount. If you are getting a raise, increase your savings rate now so your take home pay is identical. Place the extra money in your company retirement plan. You won't even notice the difference!
Take advantage of IRAs. In addition to saving in a 401(k), you can defer income tax on another $5,500 that you contribute to an IRA next year. Remember that if you're 50 or older, you can contribute an extra $1,000 for a total of $6,500.
Consider a Roth. Roth IRAs have the same contribution limits as traditional IRAs, but they are treated differently for taxes, as there's no tax deduction for Roth IRA contributions. Investment earnings in the account aren't taxed, and withdrawals after age 59 1/2 are tax-free.
Claim the Saver's Credit. If you save in a retirement account and your adjusted gross income is less than $30,750 for individuals, $46,125 for heads of household, or $61,500 for married couples, you may be able to claim the saver's credit. Contributions of up to $2,000 ($4,000 for couples) could earn you a tax credit worth between 10% and 50% of your retirement account deposit.
These are just a few of the ways you could maximize your retirement savings this year. For more information, contact your trusted financial professional. For clients of Family Estate Planning Law Group without a trusted financial professional, we may be able to help. Reach out by contacting our office to see if we can be of assistance in recommending a financial professional.
Reference: US News (November 23, 2015) "How to Maximize Your Retirement Accounts in 2016"