Contribute More To An Employer Sponsored Retirement Plan

Contribute More To An Employer Sponsored Retirement Plan

One of your long-term financial targets may be a comfortable retirement. Larger pretax contributions to an employer's retirement savings plan in 2012 can help you hit that target and reduce the amount of taxable wages you have to report on your return. You'll save current taxes while you are putting aside money for your retirement.

If your employer offers a retirement savings plan - such as a 401 (k), 403(b), 457(b), or SIMPLE plan - take advantage of it and increase your contributions before year-end. Note that your plan may allow you to make additional catch-up contributions. If you've reached age 50 and maximized your regular salary deferrals. Your contributions and investment earnings generally won't be taxed until you receive distributions from the plan.

Retirement Plan Contribution Limits For 2012
Type of plan Under age of 50 Age 50 or older
401 (k), 403(b), 457(b) $17,000.00 $22,500.00
SIMPLE IRA $11,500.00 $14,000.00
*Note that not all employer plans permit participants who have reached age 50 to contribute the higher amounts indicated. And additional contribution limitations could apply. Only SEP plans established before 1997 (SAR-SEPs) may allow employees to make pretax contributions.

You may have access to a Roth account through your employer's 401 (k), 403(b), or 457(b) retirement savings plan. Roth accounts also provide long-term tax advantages. Roth contributions are made after tax, so you gain no immediate tax benefit from contributing. However, any investment earnings in a Roth account accumulate tax deferred and qualified distributions won't be taxed on withdrawal after you've met a five-tax·year holding period and reached age 59Y, (or in certain other limited circumstances).

Take advantage of FSA benefits.

With an employer-sponsored flexible spending arrangement (FSA), you elect to pay qualified health or dependent care expenses on a pretax basis, thus reducing your taxable income. The plan reimburses you from the account for amounts you spend on expenses allowed by the plan. (Some plans allow employees to use a plan-provided debit or credit card to pay expenses directly.) Under the health care reform
law, a dollar cap of $2,500 applies to contributions to a health FSA for 2013.

Are you faced with a choice between claiming the dependent care credit and taking advantage of a dependent care FSA offered by your employer? If your top tax rate is more than 15%, using an FSA generally IS more advantageous. Under an FSA, you may contribute up to $5,000 ($2,500 if married filing separately) a year on a pretax basis to be used to pay dependent care costs. The FSA income exclusion saves you income tax at your top rate, while the dependent care credit rate for many taxpayers is limited to 20%.

Plan investment gains and losses

For 2012, the tax rates on net long term capital gains are significantly lower than the top rate of 35% that may apply to short-term capital gains, interest, wages, and other ordinary Income. These favorable capital gains rates are due to go up In 2013.

A capital gain is considered long term if you hold your investment more than one year before you sell it. Our table shows the 2012 and scheduled 2013 long-term capital gains rates for different types of Investments. Although taxes shouldn't be the only factor, you consider when planning investment transactions, waiting until you've met the long-term holding period before you sell an appreciated investment can save you taxes.

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