Key points
- Try to contribute enough to your employer plan to qualify for the maximum available employer match.
- Consider non-deductible and after-tax contributions to add to your savings.
Maximize your contributions
Far from retirement
Saving any amount toward your retirement is good — if you can, contribute the maximum allowed amount to your IRA or employer retirement plan. You should also build up short-term savings so that you don't have to tap into retirement savings for emergencies.
Taking advantage of an employer match
If you participate in a workplace plan — such as a 401(k) — consider contributing at least enough to qualify for any employer matching contribution. It's essentially free money that can help you maximize your 401(k). To get started, find out from your HR department or the plan provider's website how much you are currently contributing, the maximum allowed, and whether an employer match is currently available.
Overview of maximum contribution limits for 2009**
| Traditional and Roth IRAs (combined) | $5,000 |
|---|---|
| SIMPLE IRAs and SIMPLE 401(k) | $11,500 |
| 401(k), 403(b), 457(b), Roth 401(k) and Roth 403(b) | $16,500† |
**Note that employer matching or profit-sharing contributions do not count against these limits. Some 401(k) plans also allow for after-tax deferrals that do not count against the $16,500 limit.
†If you participate in one or more governmental 457(b) plans, you can contribute a combined total of $16,500 to such plans. You do not need to combine this deferral limit with other plan types. Deferrals to all other employer plans (SIMPLE, 401(k) and 403(b)) must be combined.
People age 50 and over can also make additional catch-up contributions every year.
Example: How Maximizing Your Contributions Can Pay Off
Maximizing your IRA - 30 Years
Let's say that you contribute $1,200 to an IRA every year over a 30-year period (2008-2037). With an annual, compounded return of 6%, your savings would total $93,675. On the other hand, if you contribute the current maximum amount to an IRA annually, and keep the other factors the same, you would end up with $390,269. That's about four times as much money, representing an increase of $296,594. The numbers are even more impressive for workplace plans, such as the 401(k) and 403(b), which have higher contribution limits.
Saving more pre-tax and after-tax contributions
You can contribute the maximum to both a 401(k) plan and an IRA in the same year, provided you have earned income and you otherwise qualify. Although you may not qualify to deduct your IRA contribution from your taxes, your savings will still grow and you won't pay taxes on the earnings until you begin withdrawals. But it's generally only good idea to fund a non-deductible IRA if your income is too high to allow you to make a Roth IRA contribution because distributions from a Roth IRA are tax-free (rather than just tax-deferred), if certain conditions are met.
Saving through other investments and accounts
Many people will need more than 401(k) and IRA savings to live in retirement. To the extent that you can afford to save additional after-tax dollars after you have maxed out your tax-advantaged options, you can do so in other types of investments. Remember, any additional saving you can do now has the potential to become a significant amount over time.
An Ameriprise financial advisor can help you determine how much you can afford to contribute each month, and how to adjust your budget to save even more.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA and SIPC.
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