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Trim Taxes by Boosting Retirement Savings

Max out your contributions while you can; limits won’t increase in 2010.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal

http://www.kiplinger.com/columns/taxtips/archive/trim-taxes-by-boosting-retirement-savings-.html

Despite a remarkable rebound in the stock market since last March, your 401(k) balance may still be a mere shadow of its former self. And it’s not just the colossal market crash that’s to blame. Overall, the past decade has been a real disappointment for investors. One of the best ways to fatten your nest egg while trimming your taxes is to max out your contributions to your retirement plan.

This year, you can contribute up to $16,500 to your 401(k) or other tax-deferred retirement accounts, such as a 403(b) for teachers and nurses, or a 457 plan for police officers and other local-government workers. That's $1,000 more than the 2008 limit. If you're 50 or older, you are allowed to put in an extra $5,500 in catch-up contributions, sheltering up to $22,000 of your salary from federal and state taxes this year (although you'll still be nicked for FICA taxes).

Tell your employer to adjust your remaining paychecks to boost your contribution if necessary. Or if you receive a year-end bonus (remember those?), ask whether you can defer some or all of it to your retirement account.

If you are self-employed or have a sideline business, you can stash away even more. And if you can’t come up with the cash just yet, don't worry. You won't have to fund your business retirement account until you file your tax return next spring.

If you are self-employed with no employees (other than your spouse), you can open a solo 401(k) plan and contribute up to $16,500, plus your business can kick in an additional 20% of your net self-employment income until the total pay-in for 2009 reaches $49,000. If you're 50 or older, you can fund an extra $5,500 in catch-up contributions for a total of $54,500 this year.

If you have a sideline business in addition to a job as an employee with a company 401(k), you can't double up on your 401(k) contributions. The same annual limit of $16,500 (plus $5,500 in catch-up contributions if you're 50 or older) applies whether you have one job or more. But you can contribute to a SEP IRA, stashing away up to 20% of your net self-employment income up to a maximum of $49,000 for 2009. SEP IRAs have no catch-up provisions for those 50 and older.

Tags:401(k) Plans
Topics:Tax Planning, Saving for Retirement