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How to Maximize the Tax Benefits of 401(k)s and IRAs

David Ning

Tax tips are always abundant this time of year. But it often takes a lot of precious time to figure out how to squeeze a bit more money out of Uncle Sam's share. Instead, aim to take maximum advantage of one of the biggest and most common tax breaks: tax-advantaged retirement accounts. Here are a few ways to keep more of your hard-earned money for your retirement:

Maximize tax-deferred accounts each year. A Government Accountability Office report found that only about 5 percent of 401(k) participants contribute up to the limit. But many people ought to think about being more aggressive with their 401(k) and IRA contributions because tax-deferred growth is a great deal. The exact benefit will depend on the types of investments you choose within your tax-advantaged accounts. Over time, the money you are not paying in taxes each year will add up to a significant portion of your nest egg. So don't miss out on the chance to contribute the maximum amount each year.

In fact, you can still max out contributions for tax-year 2012 if you haven't done so already. The deadline to contribute to an IRA is not the end of the calendar year, but actually your tax filing date. For tax-year 2012, the deadline is April 15, 2013. So there is still time to claim this tax break.

And if you've already contributed the maximum for 2012, you should still try to maximize your accounts as early in 2013 as possible. After all, markets go up over time, and you want the tax-deferred growth to benefit you for as long as possible. Sure, there's always the chance that the market will drop the second you contribute, but you will come out ahead on average if you always contribute early every year.

Get to know the matching rules for your 401(k). Some 401(k) plans won't give you the full employer match if you don't make contributions in every pay period throughout the year due to the formula they use to calculate the employer matching contribution. The details vary with each employer, but it's best to work with the plan administrator to make sure you are going to get the full match if you front load your contributions. Otherwise, it's probably best to stick with the strategy that guarantees the full match that is promised.

Consider a Roth IRA, even if you think your income tax rate will come down in future years. There are no mandatory minimum distributions for the Roth IRA while the owner is alive, which means more of the money can remain in a tax-free state longer. Depending on how long you live, the benefits of getting that money into a forever tax-free account can far outweigh the taxes you have to pay now.

Remember that IRA contribution limits are in addition to the 401(k) limits. Even if you don't qualify for a Roth IRA due to making too much money, there's a "back-door" way to make Roth contributions and enjoy the tax-free growth. You can contribute up to $5,500 (or $6,500 for those age 50 or older) to a non-deductible traditional IRA in 2013, and then immediately convert that amount to a Roth IRA.

Check out other tax-deferred options. I-bonds, EE savings bonds and 529 plans are all good candidates for those who want to keep more money working for them instead of Uncle Sam. Just make sure you understand what you are getting into before you shove a bunch of money into these types of investments.

This is a great time of year to be thinking about minimizing your taxes. But remember that tax tips may help you one time, but the tax-advantaged growth these retirement vehicles give you could benefit you for years to come.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.



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