Even if your plans for retirement are on schedule, it might be a good idea to increase the amount that you add to your savings, as doing so could allow you to retire earlier than planned or provide a cushion in the event you need to reduce your saving amounts in later years. Of course, increasing the amount that you add to your retirement nest egg is a good financial decision only if doing so does not negatively impact your finances. An example of a negative impact is an increase in outstanding debt, due to the impracticality of the amount of disposable income left to cover living expenses. Review and revise your budget to accurately determine if you have additional disposable income. If your budget analysis shows that you can add more to your retirement savings, but you are still uncertain about whether you should , you may consider doing so on a trial basis. In such cases, it may be more practical to add those additional amounts to a non-tax-deferred retirement savings account, so that no early distribution penalties are incurred in the event you need to withdraw those amounts. Consider too that if the amounts that are added to an employer-sponsored qualified plan, you may not be able to withdraw those amounts until you experience one of the plan's triggering events. A triggering event is one that qualifies you to make withdrawals from your account, such as reaching retirement age as defined by the plan or separating from service with the plan sponsor.

The accumulated amount can be added to your tax-deferred retirement accounts after the trial period, providing doing so does not result in you exceeding the contribution limits in effect for the year. The following are some of your options for tax-deferred savings:

  • IRAs: You can contribute up to 100% of your eligible compensation for the year as long as the amount does not exceed $5,000. If you are eligible, you can deduct your contribution if it is made to a traditional IRA and receive a non-refundable tax credit of up to $1,000 for the year, which helps to offset the cost of the contribution. If your contribution is made to a Roth IRA, it is not deductible, but distributions can be tax-free if they meet the requirements to be considered qualified. Before making an IRA contribution, consider the features and benefits of both types of IRAs, and choose the one that is more suitable for you. If you decide to contribute to a Roth IRA, check to ensure that you are eligible to do so, as individuals with modified adjusted gross income (MAGI) over certain amounts cannot contribute to Roth IRAs.
  • Employer-Sponsored Retirement Plans: If you work for an employer that offers a retirement plan to which you can make salary deferral contributions, you are generally allowed to contribute up to 100% of your compensation as long as the amount does not exceed $17,000 ($11,500 if the plan is a SIMPLE IRA or SIMPLE 401(k)). For traditional 401(k) plan and 403(b) plans, employers have the option of including a Roth feature that allows employees to choose between funding a traditional account or a Roth account. If your employer makes a matching contribution, consider contributing as much as is needed to receive the maximum available matching contribution, as failure to do so would mean missing out on receiving "free" money from your employer.
If you have the option of choosing between a traditional and a Roth savings account, work with a financial professional to determine which is more suitable for you. Your financial advisor will take factors into consideration such as whether it is more tax efficient to give up a deduction now for the possibility of tax-free distributions, and how your current tax rate and projected future tax rate affect the net amount you would eventually receive from either account.

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