2 Things High Income Earners Need to Know About Their 401k Plan

For someone who makes $250,000 a year, what is the maximum contribution limit into retirement accounts? Guest readers are welcome to take a guess and comment below. This is suggested because most adults are scared to look bad and have learned to care a lot about what others think. They don't want to look dumb and don't want to be wrong. Fear can stop growth and learning. Children are not afraid to guess, to mimic and to try. This is why it is well known that children can learn a new language rather easily. So, if you really want to learn the language of finance, get involved and interact. You will jump from retaining 10% of the information to retaining 90%.

According to money.usnews.com, the 2013 contribution limits for your 401k plan at work are $17,500 of pre-tax dollars. You can then deduct these contributions when you do your taxes, before you calculate your adjusted gross income.

According to money.cnn.com, there are limitations on being able to deduct contributions to your traditional IRA if you have a 401k plan at work and make $250,000. However, in this case, you should still be throwing money into a tax shelter, like a ROTH IRA. With so many laws in place, you may want some help to learn how to use the loop holes in the system. Add some comments if you know how to do this.

You can read more 2013 tax law changes at www.washingtonpost.com.

This post was reposted from http://finlit.biz/retirement-2/2-things-high-income-earners-need-to-know-about-their-401k-plan/, originally written on February 4th, 2013.

According to http://www.washingtonpost.com, “In addition to raising the contribution limits, the IRS has also expanded how many people are eligible to contribute to Roth IRAs. For married couples, the upper income limit will rise to $188,000 from $183,000. For singles, the limit will increase to $127,000 from $125,000. (All amounts are adjusted gross income.)”

A Traditional IRA is tax deferred growth, meaning that taxes are avoided now and paid when the money is withdrawn for retirement. On the other hand, a ROTH IRA is tax free growth, meaning that taxes are paid now but avoided when the money is withdrawn for retirement.

That being said, there are strategies for people who are beyond the income limitations of a ROTH IRA. They would make non-deductible contributions to a Traditional IRA and then convert the Traditional IRA savings to a ROTH IRA. People who have already taken deductions for Traditional IRA contributions may also convert the Traditional IRA savings to a ROTH IRA and pay taxes for the year the conversion took place.

See How Do You Move Money Into a ROTH IRA for more information.