For many taxpayers, saving for retirement can be challenging. Making your annual contribution limit into your IRA, however, does allow you to enjoy future benefits in terms of retirement distributions, but there are also some current benefits to consider as to why you should do your best to reach that annual contribution limit every year. Working with your tax preparer or accountant, such as R&S Tax Service Inc in Folsom, CA, to determine what the annual limit is for this current tax year. Here are five reasons why it is important to maximize your contributions every year!
More Saving Time
While it might seem for younger workers that they have decades to save for retirement, the reality is that to maximize the amount that will be available for your golden years, you need to be saving right now. The funds are invested and earning interest overtime, which allows your account to grow in addition to your annual contributions.
When you make your maximum contribution on an annual basis, then you are also maximizing the amount of interest and earnings those contributions can make over a longer period of time. This is often known as compounding. This compounding interest works best when you have a larger principal amount. So maximizing your retirement contributions allows your money to work for you!
Options for Contributions
If your employer offers a 401(k), then you can make tax-free contributions to this account on an annual basis. However, you can also make contributions to your own IRA, maximizing your yearly contribution. These contributions are often tax deductible, but the distributions will be taxed in the future.
If you meet the income limits, you could also choose to make contributions into a ROTH IRA, which does not allow you to get a tax deduction, but the distributions will be tax free. Therefore, you will want to determine the best mix for you and then be sure to maximize your contributions into each option for the greatest amount of compounding growth.
Know The Number for You
Each saving option has its own limit for contributions. Therefore, you will want to find out from your tax preparer what your limit will be for each tax year. If you are over 50, you may be eligible to take advantage of the catch-up contribution limit.
By knowing what your limits are, you can plan to reach those maximums to enjoy the saving benefit, but also any tax benefits for that year in terms of deductions.
Building to the Maximum
If the idea of putting several thousand dollars into your retirement account seems very daunting, then consider a plan to build your contribution amount over several years. Here are some ways to gradually increase your contributions to your retirement accounts.
Employer matching program – If your boss offers a matching program, then you will want to make sure that you take advantage of that by making a contribution from every paycheck. It may only be a small percentage, but with your employer’s match, you are making a regular and overtime, sizeable contribution to your IRA.
Audit Your Spending – Take the time to keep a spending diary for a week. Learn where your disposable income is being spent. Consider what spending could be reduced or eliminated and then contribute those funds to your retirement account. By finding just an extra $50 or $100 a month can result in a contribution of $600 to $1,200, in addition to your regular contribution.
Monthly Contribution – Divide your maximum contribution by 12 months and then strive to hit that amount on a monthly basis. Doing so will make the larger annual contribution more manageable.
Tax Benefits
When you reach your maximum contribution amount, then you have the ability to deduct that amount as part of your tax return. The result is that you will reduce your taxable income and thus, your tax liability. Therefore, it is worth doing the necessary work to reach that limit on an annual basis.
As you can see, there are many options to assist you in reaching the goal of maximizing your contributions on an annual basis. The benefits include reaching your retirement goals in plenty of time for you to retire.
Click on the link below to contact a tax preparer or accountant in the office of R&S Tax Service Inc in Folsom, CA, who can assist you in determining what your maximum limit is and to plan how you might be able to reach that amount on an annual basis.
