Squeezing the Last Bit into Your Retirement Plan
In my previous life (2 weeks ago) I was a CPA who knew a thing or two about taxes. Now I'm retired, so I can devote such brain power not to my employer but all to ME. Now that I work for me, I can use this power full-time for myself (and for you, to the extent these ideas may apply to you). This is the first in a series of brilliant tax ideas that will save me precious dollars in my retirement.
Whether you are leaving your job permanently or simply switching jobs, my number one tip is to front-load your 401(k) contribution before you leave that job! Generally, for 2008, you can contribute up to $15,500 to your 401(k) and an additional $5,000 if you are 50 or older. Most of us take a little out of each paycheck, so that by the end of the year we have contributed the full amount. However, there is no IRS rule that says you have to stretch your payroll deductions out over the whole year. While your employer may limit the percent you can contribute of each paycheck, I recommend that you contribute the most you can early in the year so that you max out as soon as possible.
Is contributing the maximum amount into your 401(k) a good idea? Yes! If you are retiring, you get one more full year of tax-deferred savings. If you are moving to a new job, it's probable that your new employer will have a waiting period before you can join their 401(k) plan. If you accelerate your contribution before you leave your old job, you won't miss a year of tax-advantaged savings. And if your employer matches your contribution, you get extra "free" dollars!
The other boondoggle for which I am now eligible this year for the first time is contributing to a Roth IRA. Until now, my income was too high to qualify for a Roth IRA, but since I only earned two months' salary in 2008, I can make a $5,000 contribution in addition to having maxed out on my 401(k) contribution. Plus, I can make a spousal contribution of $5,000 for my husband.
So, by front-loading my 401(k) contribution and making Roth IRA contributions, I am able to make a "last-hurrah" contribution of $25,500 into my retirement accounts.
(Next Post: Tax Tips for Retirees-Part 2-Saving Tax Dollars by Converting Traditional IRAs to Roth IRAs)