How To Save More For Your Retirement

Many taxpayers meet with their financial advisors at the beginning of each year to determine how much they can add to their retirement nest eggs for the current and upcoming tax years. Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), various limits on retirement plan contributions were increased, effective for tax year beginning 2002, allowing you to add even more to your tax-deferred accounts. To make realistic projections for your retirement planning, you need to be aware of these limits and the other benefits brought about by EGTRRA. Read on to find out how to save more for your retirement.


Tutorial: Retirement Planning

Saver's Tax Credit
As a means of encouraging certain taxpayers to contribute to their retirement plan, Congress included a provision in EGTRRA that allows eligible individuals a tax credit for contributions made to IRAs and employer-sponsored retirement plans. This tax credit, which helps to offset the first $2,000 contributed to an individual's retirement plan, is available for years 2002 and after. To be eligible for the tax credit, a taxpayer must meet the following requirements:

• Will be at least 18 years old by the end of the tax year
• Is not a dependent of another taxpayer
• Is not a full-time student
• Does not earn more than the amount indicated in the chart below (based on filing status)

The following chart shows the percentage of tax credit the taxpayer is allowed, based on his or her tax-filing status and income. For example, in 2012 an individual who is married, files a joint income-tax return and earns no more than $33,500 will be allowed to claim 50% of the first $2,000 contributed to his or her retirement plan. The tax credit for the year cannot exceed $1,000.

Credit Rate	Married - Joint Return	Head of Household	Other Categories of Filers
50%	Up to $34,000	Up to $25,500	Up to $17,000
20%	$34,00 - $36,500	$25,500 - $27,375	$17,000 - $18,250
10%	$36,500 - $56,500	$27,375 - $42,375	$18,250 - $28,250
0%	$56,500+	$42,375+	$28,250+

This tax credit was made available from 2002 to 2006 under EGTRRA, but was made permanent under the Pension Protection Act of 2006 (PPA). (To read more about the PPA, see Pension Protection Act Of 2006 Becomes Law.)

IRA Contribution Limits
Individuals age 50 and older may contribute amounts in addition to the limits shown above. These additional amounts are referred to as "catch-up contributions", so called because they allow those who were unable to fund a retirement account in earlier years to catch up on funding their retirement nest egg. The IRA participant contribution limits are as follows:

Year	Additional Catch-Up Amount
2008	$5,000	$1,000
2009	$5,000	$1,000
2010	$5,000	$1,000
2011	$5,500	$1,000
2012	$5,500	$1,000

Salary Deferral Limits
If you participate in an employer-sponsored plan, you can defer up to 100% of your compensation, up to the dollar limit that is in effect for the year. Making pretax salary deferral contributions to your employer-sponsored plan is beneficial because it reduces your current taxable income. These amounts will be taxed when withdrawn, but projections usually assume that the withdrawal will take place during your retirement years, when your income and income tax rate are likely to be lower.

Taxpayers who want to contribute the maximum salary-deferral amount may need to start early in the year. Starting early will allow you to spread the amount over the year and therefore lessen the effect of reducing your current disposable income. For instance, if may be easier to contribute $1,000 per month, instead of $12,000 all at once.
The salary-deferral limits are as follows:

SIMPLE IRA & SIMPLE 401(k):

Year	Salary deferral limit	Catch-up contribution limit
2008	$10,500	$2,500
2009	$11,500	$2,500
2010	$11,500	$2,500
2011	$11,500	$2,500
2012	$11,500	$2,500

Regular 401(k), 403(b) and Salary-Reduction SEPs (SARSEPs)

Year	Salary deferral limit	Catch-up contribution limit
2008	$15,500	$5,000
2009	$16,500	$5,000
2010	$16,500	$5,500
2011	$16,500	$5,500
2012	$17,000	$5,500

While these limits are established under federal law, your employer may implement lower limits. For instance, your employer may limit your salary deferral contributions to your 401(k) account to 10% of your compensation. If your compensation for the year of $50,000, this means you would be eligible to make salary deferral contributions of no more than $5,000 ($50,000 x 10%) for the year to the account.

Employer Contribution Limit
For SEPs, IRAs, profit-sharing plans, money purchase pension plans and 403(b) accounts, your employer may contribute up to $49,000 to your account for 2011 and $50,000 for 2012. For 401(k) and 403(b) plans, this $49,000 includes amounts you may contribute as salary deferrals, but does not include your catch-up contributions in 2011 and is also $50,000 in 2012. As such, if you are at least age 50 by year-end, your total contribution can be $49,000 + $5,500 catch-up. The amount your employer contributes is never taxed to you until it is withdrawn from your retirement account. Ask your employer about the withdrawal rules for their retirement plan.

For SIMPLE plans, your employer may either match your contribution to the plan dollar-for-dollar up to 3% of your compensation, or make a non-elective contribution of 2% of your compensation. A non-elective contribution is made on behalf of each eligible employee, regardless of whether he or she makes a salary-deferral contribution. This is unlike a matching contribution, which is made only on behalf of those who make a salary-deferral contribution. Be sure to ask your employer about the type of contribution he or she will make each year. (For more on SIMPLEs, see SIMPLE IRA Vs SIMPLE 401(k) Plans and Introduction To SIMPLE 401(k) Plans.)

Conclusion
When EGTRRA was passed, savers were given more opportunity than ever to grow a sizable nest egg for the future. If you haven't taken advantage of these savings opportunities yet, this year might be a good time to start. Be sure to consult with your tax professional about how you can benefit most from making your retirement contributions. And where possible, contribute as much as you can; this will help you to reach your nest-egg goal by your projected deadline or even sooner.