Waddell & Reed


Tax-favored retirement investment vehicles, such as individual retirement accounts (IRAs) and 401(k) plans, offer an attractive way to accumulate funds long term for your future. Are you taking full advantage of what they have to offer?

These tips may help you make the most of your retirement accounts:

Contribute the maximum

IRAs and 401(k) plans let you defer taxes on investment earnings until you receive them, presumably in retirement. The tax advantages of these accounts may offer you greater accumulation potential than similar taxable investments. As an added bonus, your contributions may generate current tax benefits: Pretax 401(k) contributions reduce your current tax liability dollar for dollar, and your Traditional IRA contributions may be tax-deductible.

For 2014, the IRA annual contribution limit is $5,500. The 401(k) contribution limit is the lesser of the maximum percentage contribution limit allowed under each of your employers' plans, or $17,500. For example, if your employer's 401k plan allows you to contribute up to a maximum of 10% of your salary, and you earn $50,000, your maximum contribution limit is $5,000, not the $17,500.

Consider catch-up provisions

For those IRA account holders who are age 50 or older, don’t forget about your “catch-up” provisions. Current legislation lets you add an extra $1,000 to annual contributions, or $6,500 per year total. While 401(k) plans allow an additional $5,500 over the annual limit.

Consider a "rollover"

You may be eligible to receive a lump-sum distribution from a qualified retirement plan if you retire, change jobs or the firm terminates its plan. If so, consider electing a direct rollover of the funds to an IRA (or to your new employer’s qualified retirement plan). A direct rollover lets your retirement savings continue to grow tax-deferred until withdrawal. Even if you are retiring, you may not need the entire balance at once. With a rollover, you can spread out the distributions – and the tax liability – through your retirement years.

Invest according to your objectives

Most 401(k) plans offer a variety of investment choices to suit a range of objectives, and you may invest IRA assets in virtually any investment. What’s more, you may adjust your investment allocations in tax-deferred accounts without current tax implications.

Taxes are deferred until withdrawal. Early withdrawals before age 59½ are subject to income tax and a 10% penalty.

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