5 Ways To Boost Retirement Savings
Published Wednesday, February 24, 2016 at: 7:00 AM EST
The federal government recently announced the maximum limits for tax-advantaged retirement plans for 2017. For example, the most you can defer to a 401(k) plan—without a catch-up contribution if you're 50 or older—is still $18,000, while the IRA contribution limit stays at $5,500. Relatively low inflation is the reason these statutory thresholds didn't budge.
1. Go the max. Many people fail to contribute anywhere near the maximum amount allowed for retirement plans. So your first step this year could be to move closer to the 401(k) limits. If you don't have a 401(k) you may be able to contribute up to 25% of compensation or $54,000—whichever is less—to a Simplified Employee Pension (SEP), or $12,500 to a Savings Incentive Match Plan for Employees (SIMPLE) in 2017. Each plan can be supplemented by IRA contributions of up to $5,500.
2. Take time to catch up. The tax law also permits "catch-up contributions" if you're age 50 or over. For a 401(k), the extra amount is $6,000 in 2017, which could boost your total contribution to $24,000. And older IRA contributors can kick in an extra $1,000.
3. Be a matchmaker. Beyond raising your own contributions as much as is possible, also be sure to take full advantage of any matching contributions offered by your employer. Typically, a company might provide a match of 50 cents for every dollar you put into your plan, up to 6% of compensation. In this case, if you were earning $100,000 and contributed $10,000 to the plan, $6,000 of that amount would qualify for an employer match of $3,000.
4. Convert to a Roth. Although the maximum salary for eligibility to contribute to a Roth IRA did rise slightly for 2017, you still may earn too much to qualify. But anyone, regardless of income, can convert assets in a traditional IRA to a Roth. Although you'll owe current tax on the amount you convert, most distributions from a Roth during retirement—and after your account has been in existence for at least five years—will be completely tax-free.
5. Avoid unnecessary penalties. If you violate the rules for early withdrawals from employer-sponsored retirement plans and IRAs, you generally will owe a 10% penalty tax on top of the regular income tax liability. Although there are a few exceptions, this applies to most withdrawals that you make before you reach age 59½. You also can be hit with a 50% penalty for failing to take required minimum distributions after age 70½. These penalties can erode your savings substantially.
These are among the ways to make sure that this year is a good one in terms of making your retirement savings grow.
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