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Max Out Your Retirement Savings

For most people, the best way to cut your tax bill today is to maximize your retirement savings for tomorrow.

By Mary Beth Franklin

November 28, 2008

The recent stock market turmoil may have scared away millions of investors, but it’s more important than ever to save for your long-term goals.

The bad news is that your 401(k) balance may have shrunk by 30% or more over the past year. The good news is that if you continue to fund your retirement account on a regular basis, you will be buying shares of stocks and mutual funds at bargain prices. When the market rebounds, you’ll be well on your way to reversing your losses and building future wealth.

You can contribute up to $15,500 to your 401(k) or other tax-deferred retirement accounts, such as a 403(b) for teachers or a 457 plan for police and other local government workers, by the end of the year. That's the same as last year's limit. If you're 50 or older, you are allowed to shelter up to $20,500 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, ask if 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, lowering your tax bill dollar for dollar. And if you haven't been able to come up with the cash just yet, don't worry. You won't have to fund your business retirement account until you file your taxes 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 $15,500; plus, your business can kick in an additional 20% of your net self-employment income until the total pay-in for 2008 reaches $46,000. If you're 50 or older, you can fund an extra $5,000 in catch-up contributions for a total of $51,000 this year.

If you have a sideline business, you can't double up on your 401(k) contributions. The same annual limit of $15,500 (plus $5,000 in catch-up contributions if you're 50 or older) applies whether you have one job or more than one. But you can contribute to a SEP IRA, stashing away up to 20% of your net self-employment income up to a maximum $46,000 for 2008. There are no 50-plus catch-up provisions for SEPs.

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