5 Ways to Maximize Your Retirement Account in 2016

Uncle Sam gives you certain tax breaks if you’re stashing money away for retirement in a qualified account. It’s in your best financial interest to take advantage of every tax benefit you can by maximizing your retirement account contributions. Here are five ways to do just that.

1. Max out Your 401(k)

If you have the opportunity to participate in a 401(k) account at work, then take full advantage of it. In 2016, you can contribute up to $18,000 in that account. If you max out your contributions, that will save you about $4,500 per year if you’re in the 25 percent tax bracket or $6,300 per year if you’re in the heftier 35 percent tax bracket.

You will, however, pay income taxes when you draw money on the account during retirement. So, be prepared for that when it comes time to retire.

2. Make Additional Contributions, If You Qualify

If you’re over the age of 50, then you’re allowed to put an additional $6,000 annually into your 401(k) account in 2016. That means that you can contribute as much as $24,000 into a retirement account with full tax benefits for the year. That will reduce your tax bite by $6,000 if you’re in the 25 percent bracket and $8,400 if you’re in the 35 percent bracket.

3. Take Advantage of the Employer Match

Some employers offer the much-coveted employer match when it comes to making contributions to your 401(k). That means if you contribute 5% of your paycheck to a 401(k), your employer will match your contribution up to a certain percentage.

That’s free money.

Remember, though, that the tax man will eventually come calling for that income. Plan accordingly when you retire so that you’re in a position to draw on your account plus pay the necessary taxes.

4. Use IRAs

IRAs, unlike 401(k) plans, work independently of your employer. If you set up an IRA in 2016, you can defer income tax on an additional $5,500 that you contribute to your retirement. If you’re over the age of 50, you can contribute an additional $1,000 annually.

As you’d expect the tax rules regarding IRA’s can get complicated. Keep in mind that if you have a 401(k) at work, you won’t be able to take full advantage of the tax benefits associated with an IRA if your modified adjusted gross income is greater than $60,999 and less than $71,0001 (or greater than $97,999 and less than 118,001 for married couples).

5. Open a Roth IRA

Roth IRAs have the some contribution limits as traditional IRAs. However, they’re treated differently for tax purposes. With a Roth IRA, you put after-tax money into your account when saving for retirement. The advantage there is if you opt for early retirement or have to withdraw the money for an emergency, you won’t owe the IRS a penalty.

Before you know it, you’ll be in your golden years and ready to take it easy. To get the most out of that time, make sure you save for retirement and take full advantage of U.S. tax laws.