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Year End Retirement Plan Moves

by Ryan Guina

Last night my wife and I went over our retirement accounts and discussed our current contribution levels. The end of the year is rapidly approaching and there is a limited amount of time to sock away as much money as possible before the end of this year’s tax period.

Get your money working for you now

You only get one shot at contributing to your retirement accounts and once the deadline has passed, you can no longer make contributions for that year. My wife and I want to take advantage of this, so I increased my 401(k) contributions to 50% of my salary, the maximum allowed by my company. This is only for the remainder of the year, and we have enough money in our savings that it won’t affect our ability to pay our bills. You only get one chance to prepare for retirement, and the more you contribute now, the better the odds you will reach your investment goals for retirement.

Save on taxes

Contributions to both traditional IRAs and 401(k) plans are made with pre-tax income and can substantially lower your tax bill (contributions to Roth IRAs and Roth 401(k) plans do not lower your tax bill). The tax deduction is a nice incentive to save money for retirement. I already maxed out my IRA for this year, which is another reason why I increased my 401(k) contributions.

Beat retirement account contribution deadlines

If you have a limited amount of funds and are trying to get the best bang for your buck before the year ends, I recommend contributing to your 401(k) plan before your IRA because you only have until Dec. 31 to make a 2008 tax-deferred contribution to your 401(k). You have until April 15th of next year to contribute to an IRA for the 2008 tax year.

Pay attention to maximum contribution limits

Keep in mind that you cannot contribute more than the annual limit for any retirement account. For most defined contribution plans (401(k), 403(b), TSP, etc.), each person can contribute up to $15,500 (or $20,500 if you’re 50 or older) in 2008. You can contribute up to $5,000 per person into an IRA in 2008 (or $6,000 if you’re 50 or older) . The limits are the same for both Roth and Traditional IRAs. Retirement plans for people in small companies (SEP IRA) or who are self-employed may have different limits.

Worried about the markets? Contribute anyway

With the current economic crisis, stocks are selling at prices substantially lower than they were just a few months ago. With prices lower across the board, now may be a good time to invest more money toward your retirement. If the current market conditions make you nervous, then consider investing in a CD ladder or money market account. The idea is to get your money working for you as long as you can.


Published or updated November 12, 2008.
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{ 10 comments… read them below or add one }

1 Miranda

Thanks for the great post! We’ve upped our retirement plan contributions at this time, hoping to take advantage of the low prices. We have a 30 year timeframe, so we’re thinking that this is a great time to get a little more for a little less.

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2 Jarhead

INVEST INVEST INVEST

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3 John Hunter

In fact I am increasing my retirement contributions. While it is true Roth IRAs do not offer tax deductions the advantage of not owing taxes in the future on the Roth IRA withdrawals is a huge benefit. Especially since the increasing debt of government is making increasing rates in the future to pay for the high spending today more and more likely. You can’t expect to spend beyond your means forever.

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4 Ryan

John: I agree 100%. I’ve increased my contributions as well, and will try to front load my contributions next year. I use a Roth IRA and a Traditional 401(k). So I get a tax break now and in retirement.

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5 money-saving-tips

Timely advice. The theory of “dollar cost averaging” says that boosting your contribution levels now, while the market is in a slump, is a great idea. Or stated another way, “buy low” is great advice :)

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6 stephen roland

This is extremely sound advice!

The best thing you can do right now is put money in to your retirement funds!

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7 Diane

I retire in 11 years. My 401k is losing rapidly. I am in a 2020 plan. Should I hold the course or switch to an IRA?

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8 Ryan

Diane:
I would recommend holding the course – you have 11 years, and our economy and the world economy will be a different place by then. Selling your holdings now will only lock in your losses and not give you a chance to earn back your losses.

As for the IRA, there isn’t going to be much difference from your 401k. They are both only retirement vehicles. It’s where you put your money (which investments you buy) inside those vehicles that matter. You can probably purchase very similar holdings in your 401k to what you could buy in an IRA.

I plan on riding out the storm and hope that my holdings increase in value in the coming decade.

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9 john

I am over 50 and work for the federal government. I forgot to make the maximum allowed contribution ($17,500 plus $5,500 catch up) to her Thrift Savings Program (TSP) in 2013. Can I still contribute to max-out my allowed limit of $23,000 for 2013 now (2/2014)?

thanks for the help,
John

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10 Ryan Guina

John, contributions to the TSP must be made during the calendar year. You can’t go back and make contributions after Dec. 31st of the contribution year. You can contribute to IRAs, however, until the tax filing deadline of April 15th. So be sure to contribute to an IRA if you haven’t yet maxed it out. The max for the 2013 tax year is $6,500 if you are over age 50 ($5,500 normal limit, plus a $1,000 catch-up contribution).

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