The two popular savings plan has been the traditional and roth IRA. In traditional 401(k) contribution employers deduct money from a paycheck prior to taking taxes out, and the money is placed directly in the employee’s 401(k) plan account. On the other hand, in Roth 401(k) contributions employers deduct money from a paycheck after taking taxes out. While traditional contributions are subject to ordinary income tax at the time of withdrawal (at retirement), in Roth IRA the amount at the time of withdrawal (at retirement) is not subject to income tax
With taxes projected to increase next year onwards, it’s high time you reconsider how you’re contributing for the coming financial year. If your aim is to reduce the taxes you shell out in your lifetime, you first need to figure out whether you’ll be in a higher tax bracket now or during retirement. Though it’s hard to predict what tax would be levied when you retire, it’s safe to presume that it would be more than what you pay now. Based on this you need to find out how you contribute in 2013.
Can I increase my 401(k) contributions in 2013?
As you inch towards retirement, a good way to augment your savings is to enhance your 401(k) savings rate by 1 percent every year. This would help one max out his 401(k) contribution limit every year. With incremental increase each year you adjust your budget by taking small bites annually. Stashing away a little more a little earlier can make a huge difference in the long run.
Some employers will automatically increase your contributions for you. AN employee also enjoys the option of enrolling in an auto-increase benefit. Likewise there are plans that enroll all participants automatically. An annual auto-increase of 1 percent is something that is quite common, though it depends solely on the plan. A plan administrator can enlighten you on whether or not auto-increase is available.
In 2013, the maximum salary deferral amount will be increased to $17,500. Those who can save up to this amount need to review their percentage so that they can take advantage of this increase.
What should I do with my year-end bonus?
Given the impending uncertainties it is good if you don’t spend all your year -end bonus. ! You can keep the money away for better use in 2013. As most employers pay bonuses in December or January, it wouldn’t take you much of an effort to keep the money away from your expenses. A good move would be to move the money straight into a savings account. With the funds in your account, you’ll be in a better position to take on the ensuing changes with confidence—like enhancing your 401(k) contributions or clearing-off debts. If you manage to hold on to your savings, it can spur you to save more.