Effective for 2013 (this year), the IRS increased the maximum amount of money that can be set aside in retirement accounts. If you have not done so, you need to review your 401k withholding and IRA contribution plans to make sure that you are taking full advantage of these tax deferral vehicles.
The maximum amount that you can put into a 401k account has increased from $17,000 to $17,500. If you are age 50 or older, you are also allowed an additional contribution of $5,500 to bring your total 401k withholding to $23,000 per year.
Even if you are contributing to a 401k at work, you are also allowed to contribute to an IRA as long as your contribution does not exceed earned income. For 2013, the maximum amount that you can contribute to an IRA is $5,500. If you are age 50 or older, you can contribute up to $6,500. These contribution amounts apply to both Traditional (Roll-over) IRA’s and Roth IRA’s.
Traditional IRA’s allow you defer your taxes until you withdraw the money out of your IRA account. You are allowed to deduct the amount of your IRA contribution from your income for this year’s tax return. Remember that an IRA is a retirement account, so most distributions taken out of a Traditional IRA before age 59 ½ are penalized. After age 59 ½, distributions count as current income for tax purposes. The advantage of the IRA is that you will be paying taxes when you are in a lower tax bracket. If you do not start taking distributions from your IRA account before 70 ½, the government requires you to start taking distributions at that time.
Roth IRA’s allow you to grow your capital tax free. There are income limits that prevent people in higher tax brackets from contributing to a Roth IRA. Consult your tax advisor before contributing to a Roth IRA. You are not allowed to take an income tax deduction for contributions to a Roth IRA. Distribution of earnings before age 59 ½ are penalized, but after 5 years you are allowed to withdraw any Roth IRA contributions from your account. After age 59 ½, distributions are free of any tax. Since the government is not allowed to tax your distributions, you are never required to take distributions from your Roth IRA.