End of Year Reminder

October 19, 2015

As we approach the end of the year, now is a great time to review how much you have saved and make sure you have maximized your opportunities to use your retirement savings account. For 401(k), 403(b), and 457 plans, the contribution limit in 2015 is $18,000. If you are 50 or older you get an additional $6,000 and can contribute a total of $24,000.

 

Why is it so important to take advantage of a retirement account? It is because of the tax savings which allow you to make the most of your money. Take for instance someone in California who has to pay federal and state taxes. Let’s assume they are in the 28% bracket for federal and 9.3% state. If you put $1,000 into a savings account, you will have 37.3% taken out for taxes and only save $627, plus all future growth is taxable. If you were to contribute that instead to a 401(k), the whole $1,000 is saved plus any matching that your firm may provide and all future growth is tax-deferred. Eventually, this will be taxed when it comes out, but typically you will be in a lower bracket in retirement.

 

If you are approaching the end of the year and didn’t save as much as you would like, there is still time to catch up. If you have more than enough safety reserves in the bank (3-6 months), it may be worth turning up your contributions through the end of the year to take advantage of the tax savings.
 

For those of you without retirement accounts, it can be a little trickier but still worth taking the time to review. You can contribute directly to an IRA, but the limits are much lower and subject to income limitations. If you are self-employed you can contribute to a SEP IRA or even open an individual 401(k) which has much higher limits. If you are employed by a firm but your company doesn’t have a plan, it can be more difficult if you want to save above the IRA limits. Let us know if you are struggling to find an efficient way to save and we can help make sure you are making the most out of what you have.

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