Many individuals and households have been trimming the family budget for leaner times. Go ahead and cut back on coffee drinks, pack a lunch and arrange to carpool to work. But when it comes to finding additional areas to cut expenses, don’t make the mistake of scrimping on your tax-advantaged retirement plan contribution.
Making your annual contribution to a tax-advantaged retirement plan, including 401(k) and 403(b) plans, can reduce your current income tax as well as allow your account to grow tax-deferred. As much as the tax savings makes sense, when the budget is pinched, you may be tempted to skip a year.
There are three commonly offered excuses for not contributing to your retirement plan this year – and an equal number of counterpoints to suggest why you should.
Excuse #1: My company won’t match this year.
Counterpoint: Companies that normally match their employees’ contributions to retirement plans may suspend their match in a year when company profitability is under pressure. The fact is, you compound the gap in retirement growth if you follow suit and fail to make a current-year contribution.
Excuse #2: We’re trying to put more money in the bank.
Counterpoint: The money you put away in an individual or joint account is after tax money and the interest earned on the account is also subject to tax. In a 30 percent tax bracket, it would take $1,428 of pretax dollars to equal a contribution of $1,000 in a tax-deferred retirement account. What’s more, that doesn’t account for the taxes you’d pay on interest earned in your taxable account.
Excuse #3: I’ll catch up on retirement saving next year when the economy improves.
Counterpoint: If you normally contribute the maximum contribution limits, you will not catch up. The 2012 contribution limits remain at $5,000. The maximum annual contribution an employee can make through salary reduction to a 401(k) plan will remain at $16,500 while catch-up contributions for employees older than 50 will stay at a maximum of $6,000. Once you miss making a maximum annual contribution, you cannot make it up due to contribution limits.
While you may not miss funding your retirement account this year, chances are you will in the future. In the 2010 Wells Fargo Retirement Study, 50 percent of respondents expect to derive a portion of retirement income from IRA savings. In addition, only 33 percent of those surveyed have a detailed written retirement plan, and 65 percent believe they should be saving more and could be if they had more guidance or advice.
Think about making the contribution now and err on the side of retirement preparedness. If you get it wrong once you retire, it can be difficult or not feasible to go back to work and make up the shortfall.
This article was written by Wells Fargo Advisors and provided courtesy of Todd Alexander, The Alexander Financial Group in Mc- Connellsburg.
Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFFN), and Member SIPC. The Alexander Financial Group is a separate entity from WFAFN.