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Turn Taxes Into Retirement

According to most studies -- including this one conducted by Allstate (NYSE: ALL  ) -- the biggest reason Americans don't save for retirement is a lack of "disposable" income. After paying the bills, who has money left over for so-called elective contributions to a retirement account?

In fact, you might have some extra money right now that's being held by someone else: Uncle Sam. Like most Americans, you probably have too much money withheld from your paycheck. And we're not talking chump change. According to the Internal Revenue Service, the average tax refund in 2002 was $1,967.

While it's nice to get that check in the mail, you don't have to wait until you file your taxes and receive your refund to increase your new worth. You can adjust your withholding now and begin taking home more pay within weeks.

But if you're behind in your retirement savings, please don't spend that extra cash. Instead, sign up for your company retirement plan or open an Individual Retirement Account (IRA). If a 40-year-old contributed that $1,967 refund annually for 25 years to an IRA and earned an average 8% a year, she'd add almost $165,000 to her nest egg. Act now -- you have until April 15, 2004, to make a 2003 contribution to your IRA.

A sizeable tax refund isn't the only reason to adjust your tax withholding. Others include a major life change (marriage, divorce, birth of a child), a change in income (a big raise or move to part-time), new deductions (a mortgage or participation in a tax-deductible retirement plan), and new tax laws.

How do you calculate your new withholding? Use the IRS' online withholding calculator. (You'll need a recent pay stub and your most recent tax return to complete the rigmarole.) Once you've calculated your proper withholding, submit a new W-4 with your employer. Then immediately sign up for, or increase your contributions to, your retirement plan at work. However, if your contributions aren't matched by your employer, you might be better off in an IRA. To learn more, visit our IRA Center.

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10/28/2016 4:04 PM
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