With the beginning of the New Year, there are lots of opportunities to give your financial future an extra boost. Besides investing your retirement money correctly, one of the very best ways to do that is to maximize your 401k and IRA contributions. Even though some of the laws that govern these plans have changed, don’t expect your HR or tax advisor to tell you about it. Typically, they just don’t bother.
No worries. Here’s a quick summary of the current regulations and how to leverage these rules to benefit you and your family as much as possible.
The rules governing 401k eligibility have stayed pretty much the same. You can slide up to $18,000 a year into your 401k and if you are 50 or older, you can slap on an extra $6,000. The interesting thing is that very few people actually take advantage of these generous limits. According to Vanguard Group, only 11% of the participants max out their contributions. That means a lot of people are leaving a big pile of money on the table. Don’t be one of them.
Depending on your income, you may not be able to put in the entire $18,000. But my suggestion is to do whatever possible to get to the maximum contribution for your income level.
I love 401ks because you can grow your money tax deferred, there is often a matching element and it’s expensive for you to spend that money (which means most people leave that money alone, allowing it to really grow).
IRA contribution limits haven’t changed. You can drop $5,500 into your IRA plus another $1,000 if you are 50 years old or better.
Keep in mind that just because you can deposit money into an IRA doesn’t always mean you can deduct the entire contribution. Your ability to deduct this investment slowly evaporates if you or your spouse is eligible to participate in a plan at work. If you are single, the deduction phases out between $61,000 and $71,000 of modified adjusted gross income (MAGI). If you are married filing jointly, the phase out starts at $96,000 and ends at $116,000. But if you have the IRA and it’s your spouse who has the work retirement plan, your phase-out range is $183,000 to $193,000.
You can contribute to a Roth IRA as long as your AGI is below $116,000 for singles. That’s where the phase-out starts. It ends at $131,000. The range for people who are married filing jointly is $183,000 to $193,000 for the Roth.
If you are a DIY investor, do you have the right IRA custodian? If not, you could be paying too much in fees and be forced to use antiquated resources. Consider Tradeking if you are in the market for a great custodian. Read my review for more info.
What you should do now.
The most important thing to do right now is first find out how much you are able to contribute to the plan at work and/or your IRA. Once you have that information, decide on how much you plan on contributing. Hopefully, you’ll be able to get up to the limit. That is the #1 best way to put your financial life on the fast track.
Once you know how much you are going to contribute, it’s time to automate your plan. If you are part of the plan at work, have the HR people take out enough each pay check so that by the end of the year you will have put in up the maximum. If you are funding an IRA, have your custodian draft in a set amount each month so that by the end of the year you will deposit your maximum allowable contribution.
Knowing what to do with your 401k and IRA isn’t complicated. And you don’t have to be a Bernard Bernanke or be a tax whiz in order to put these powerful retirement tools to work. Just find out how much you are allowed to contribute and then automate those investments. If you have trouble coming up with enough scratch to make those investments, track your spending and reorganize your budget. I know this is easy to say and sometimes hard to do. I get it. But if you really want to have more financial freedom I urge you to make this a priority. You be glad you did.
Are you maxing out your retirement plan contributions? Why or why not?