How Much Can You Put Away Each Year for Retirement?
With the company pension quickly becoming an endangered species, it has never been more important for workers to build their retirement nest eggs. If you have sufficient cash flow and earnings to do so, you can put aside a considerable amount of money each year, with much of that money sheltered from current, and even future, taxation.
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401k and 403b Plans
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Workplace retirement plans like the 401k and 403b provide the most generous contribution limits, making them the basis for many people's retirement planning. For 2011, you can put a full $16,500 into your 401k or 403b plan, plus an extra $5,500 if you are 50 years of age or older. That is a full $22,000 you can shelter from current taxation, since every dollar you contribute to a 401k or 403b is deducted from your Federal taxable income.
IRA Accounts
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IRA accounts come in two flavors -- traditional and Roth. With a traditional IRA, you get an up-front tax deduction for the amount you put in, but you must pay taxes when you withdraw the money in retirement. A Roth IRA turns that formula on its head, eliminating the up-front tax deduction but giving you tax-free withdrawals once you retire. Workers who expect taxes to rise in the future can consider a Roth IRA, since those long-term tax savings can be more valuable than the up-front tax deduction. But no matter which type of IRA you choose, the contribution limit is the same. You can contribute up to $5,000 for 2011, plus an extra $1,000 if you are at least 50 years of age.
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Self-Employment
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If you run a business or do consulting work on the side, you can put more money aside with a SEP-IRA, individual 401k or similar program. For instance, a SEP-IRA allows you to put away between 20 and 25 percent of your income, up to a total of $49,000 for 2011. Putting money into one of these plans can also reduce your tax bill considerably, giving you an extra benefit as you save for retirement.
Additional Savings
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If your financial situation allows you to max out on both your workplace retirement plan and your IRA, you can still save more if you wish. You will not get any additional tax breaks, and the money you put in is post-tax, but you can still put more money toward your retirement. You can, for instance, transfer money from your checking account each month and invest it in a fund earmarked for retirement savings. The only limit to this type of personal retirement account is your ability to fund it.
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References
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