Author: Emily Brandon
The new year is an excellent time to start saving a little more for the future. There are also a variety of perks you might qualify for if you put some extra money aside for retirement. Aim to take advantage of these incentives to save for retirement this year.
An employer match. Many companies will match the amount you save in the company 401(k) plan. One common 401(k) match formula is 50 cents for each dollar contributed to the 401(k) plan up to 6 percent of pay. Some employers will even match your 401(k) contributions dollar for dollar, which is a quick way to double your retirement savings. "If your employer offers a 401(k) plan, then always contribute at least enough to get the employer match," says Courtney Ranstrom, a certified financial planner for Trailhead Planners in Portland, Oregon. However, pay attention to your company's vesting schedule when making career change decisions. You don't get to keep all the employer contributions to your 401(k) until you are fully vested in the plan, which might require several years on the job.
A tax deduction. You can defer paying income tax on the money you deposit in a traditional 401(k) or traditional IRA. 401(k) contributions are typically deposited before taxes, so less tax is withheld from each paycheck. Many people make IRA contributions shortly before filing their taxes. You can plug an IRA contribution into your tax planning software or ask your tax preparer to run the numbers to see how much your tax bill will be reduced by a last-minute IRA contribution. For example, a worker in the 25 percent tax bracket who puts $1,000 in an IRA will be able to reduce his current tax bill by $250. Income tax won't be due on the money until it is withdrawn from the account. "The incentives to save for retirement increased tremendously with the passage of the 'Tax Cuts and Jobs Act'," says Jason Howell, a certified financial planner for Jason Howell Company in Vienna, Virginia. "Since many itemized deductions were taken away, one of the best ways to reduce your taxable income is to ensure you are maximizing any employer matching contributions to your 401(k)."
A bigger 401(k) contribution limit. If you maxed out your 401(k) in 2017, remember to reset your contributions a little higher this year. The 401(k) contribution limit increased by $500 to $18,500 in 2018. To take advantage of the full tax break you will need to increase your withholding by about $21 per twice monthly paycheck. Even if you can't max out your account, boosting your savings rate will get you a bigger tax deduction. Reallocating a raise or bonus to a retirement account can make a savings increase painless. "I always suggest to clients that they increase their contributions to their company retirement plan as soon as they receive the good news," says Krista Cavalieri, a certified financial planner for Evolve Capital in Columbus, Ohio. "The benefit of doing so means they will increase their savings before they have adjusted their lifestyle to their new salary. They won't miss the money and it will make a difference in their savings plans."
Catch-up contributions. Workers age 50 and older are eligible to make 401(k) catch up contributions of up to $6,000 in 2018, for a maximum possible 401(k) contribution of $24,500. Older workers can also contribute an extra $1,000 to IRAs in 2018. Catch-up contributions give employees approaching retirement age an opportunity to save more for retirement and qualify for some extra tax breaks.
The saver's credit. Low-income workers who manage to save for retirement may qualify for a tax credit in addition to the tax deduction for saving in a 401(k) or IRA. The saver's credit may be claimed by retirement savers who earn up to $31,500 as an individual, $47,250 as a head of household or $63,000 as a married couple in 2018. The credit is worth between 10 and 50 percent of your retirement account deposit of up to $2,000 for individuals and $4,000 for couples, and those with the lowest incomes get the biggest credits.
Automatic Saving. Many employers allow you to make regular deposits to a 401(k) plan directly from your paycheck. Some companies will also automatically increase the amount you save over time. If your employer doesn't provide a 401(k) plan, you can set up automatic saving on your own. "For those who do not have a company retirement plan, I suggest automating their savings to an appropriate retirement account such as a traditional IRA or Roth IRA," Cavalieri says. "If they get paid on the first they should have $50 to $100 dollars automatically deposited to their account on the fifth."
Tax-free retirement income. While traditional retirement accounts qualify you for a tax deduction in the year you make the contribution, you will need to pay income tax on that money when you take distributions from the account. With a Roth 401(k) or Roth IRA, you don't get the tax break up front, but the money in the account grows without being taxed and withdrawals in retirement may be tax-free. Roth accounts often work especially well for people who currently pay a low tax rate or have a long time for the money to grow before retirement. You can also save in both a traditional and Roth account in the same year in order to qualify for both types of tax breaks.