Making contributions to a traditional employer-sponsored defined contribution plan, like a 401(k), 403(b) or 457 plan can be a smart financial move with multiple benefits.
- Your contributions are pretax, which lowers your modified adjusted gross income (MAGI). This can also assist you in reducing or avoiding exposure to the 3.8% net investment income tax.
- Your plan assets can grow tax-deferred. This means you won’t have to pay income tax until you begin to take distributions.
- Your employer may match some of all of your contributions pretax.
In 2015, you may contribute up to $18,000. If your current rate of contribution leaves you at less than the limit, you might consider raising your contribution rate through the end of the year. Raising your contributions sooner rather than later can have a large impact on the size of your investment at retirement due to the tax-deferred compounding.
If you are among those who will be 50 years old or older by December 31, you may also make “catch-up” contributions (up to $6,000 for 2015). So if you starting contributing later in life and are regretting not starting sooner, this may allow you to at least partially make up for it. Even if you were a savvy investor, the catch-up contributions may still provide a benefit through allowing you to maximize the tax-deferred compounding on your investment.
If you would like more information on your current plan, contact our office in Joplin, MO. One of our Certified Public Accountants would be happy to discuss your tax planning and retirement situation with you.