Perhaps you only have a few years left until you retire. Your income is high and you're trying to save more for retirement. Now is the time to maximize your retirement plan contributions. Here's why...
If you've just a few years left before retiring, you're probably earning a lot more than what your retirement income will be. Most likely you've paid off your house, the kids have moved out, and you're in the best position to sock some of your earnings away.
So take advantage of Uncle Sam's regulated retirement plans - especially the ones with the deductible contributions. Let's list the maximum contributions you can make for each of the retirement plans in 2014.
Note that if you're 50 or older you often can make a higher contribution.
-2014 Contribution limits are:
* Traditional and Roth IRA: 5500, 6500 if 50 or older
* SEP IRA: 52,000
* SIMPLE IRA: 12,000, 14,500 if 50 or older
* 401(k), 403(b) and 457 plans: 17,500, 23,000 if 50 or older
* Defined Contribution Pension: 51,000
* Defined Benefit Pension: 210,000
These plans sometimes allow you to make a profit without the investment even growing! As an example, some of your company plans - like a 401(k) or 403(b) - may offer a matching contribution to your plan at least to some percent of your income. So whatever you contribute - at least to the match limit- gives you a 100% profit on your contribution. You can't go wrong. Check if your company will match your contribution and be sure to contribute that much.
Another way you may benefit quickly over just a few years is because your highest tax bracket after retirement will most likely drop considerably. This change can give you a tax-based profit on what you actually contribute now. Here's how.
Your plan contributions which are tax-deductible reduce your taxable income off your highest tax bracket rate. So if you contribute a $1,000 deductible within your 28% tax bracket, you're out-of-pocket cost to you is $720 (72% of $1,000), yet you have the full $1,000 in the plan.
If you then retire with a considerably lower income, you may decide to withdraw that $1,000. But though it's taxable income, it may only be taxed at 15% - your new 'highest' tax bracket. That means you pocket $850 (85% of $1,000). So you can see that even without any investment growth you've converted a $720 investment into $850 - all because of a change in your tax bracket - clearly tax-based profit.
And remember, unless you have a very high income, your Social Security income won't be taxed. So you can have a respectable take-home income and still reap those tax-based profits by making judicious retirement plan withdrawals. Choose your withdrawal amounts consistent with keeping you in the lower tax brackets.