You already know the tax benefits of making retirement plan contributions — your contributions offer the double benefit of tax deferral on asset growth inside the plan and a lower adjusted gross income in the current year that can increase other tax breaks. But are you taking full advantage of these benefits? For 2016, you can contribute up to $18,000 to your 401(k), plus another $6,000 if you’re age 50 or over. The maximum contribution to an IRA for 2016 is $5,500, plus an additional $1,000 when you’re age 50 or older. If you haven’t adjusted your annual contributions in a while, you may be missing an opportunity to boost your retirement savings.
Here are four times to consider increasing your contributions.
- When the kids leave home. According to the U.S. Department of Agriculture, the average annual cost of raising children is approximately $16,000. Once your children leave home, review your budget to determine whether you can direct additional savings to your retirement accounts. Perform the same review any time your expenses decrease, such as when you pay off a credit card balance or vehicle loan.
- Pay raises. When your income increases, direct all or part of the additional money to your retirement plan. This strategy can be especially valuable when your employer matches contributions.
- When your employer’s percentage increases. If your employer makes a contribution to your account that matches all or part of the amount you contribute, taking full advantage of those “matching” dollars is a smart move. When the match goes up, increase your contributions.
- When AMT or other taxes may play a role. Because retirement plan contributions reduce your adjusted gross income, increasing the amount you put in your accounts can help limit your exposure to taxes such as the alternative minimum tax and the net investment income tax.
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