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.
It’s easy to automatically contribute money to your retirement accounts and then forget about them, but it’s important that you take the time every year to review your account and how much that you’re putting in those accounts. More than likely, some things have changed since the last year, and that might mean that you need to make some financial changes as well.
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.
I know that managing your retirement accounts is not a fun task, but it’s one of the most important things that you can do. Unless you want to spend the rest of your life working, it’s important that you plan for your retirement dreams. Sadly, there are a vast majority of Americans that haven’t made the plans that they need to reach a comfortable stage of retirement in the future.
Thanks to all of the websites and resources on the Internet, planning your retirement, and getting your finances on track has never been easier. Don’t wait another year to take a long and hard look at your retirement plans and make any moves.