One great way to save for retirement is contributing to your 401(k).
Maxing out your 401(k) can benefit you as an investor in terms of your tax liability and build wealth for the future. Tune in, as Fool contributor John Maxfield shares a few tips investors should consider as 2015 comes to a close.
Listen to the full podcast by clicking here. A full transcript follows the video.
This podcast was recorded on 11/30/15.
Gaby Lapera: Another thing that you should think about doing is making a contribution to your taxed advantage retirement account. So it's 401(k)s, IRAs. The 401(k) limit for 2015 is $18,000, and you can deposit an additional $6,000 if you're over 50, and for IRAs the yearly limit is $5,500 and $1,000 more if you're over 50 years old.
John Maxfield: Yeah, and just use these, right? If you can use the tax-advantaged retirement account, use them, right? Because let's just give an example. Let's say you can put $10,000 into it, your marginal tax rate is 25%, or let's say your average tax rate is 25%. Just by putting that $10,000 in income and transferring it over into a different account that you still control, that you can still see on your computer screen, you're going to save yourself $2,500 in taxes. So it's basically an immediate 25% return on your money.
So again, just like tax-loss harvesting, reduce your taxes. That's really what you should be thinking about as an investor right now.
Lapera: Of course, that's only for the traditional accounts. With Roth IRAs you're going to be taxed up front.
Maxfield: Exactly, exactly.
Lapera: Just keep that in mind.
Maxfield: Yeah, and that's a really important point to keep in mind. Yeah, thank you, Gaby, that was a really important point. Roth, you're not taxed when you withdraw, but you are taxed on your income in the current year. But again, just if you can use your retirement savings accounts, use them. If you can't, then you can't.
Lapera: Right. I mean the other thing is with 401(k)s, if you have one, most employers have matches. So you just want to take advantage of that matching. I mean, even if that doesn't help you necessarily now, because there's withdrawal penalties. Down the road it'll help you quite a bit.
Maxfield: Yeah, and the thing is, is that what's so great about America, one of the things that's great about America is we have this incredibly powerful economy. And that economy is powered by our consumers, right? So spending as much money as they can possibly spend. So for the country it's a really good thing if everybody's going out and spending all the money. But for an individual, you need to save. And I know saving is hard and things like that, but these are vehicles that can make savings easier, because they can accelerate your savings by reducing your tax liability.
Lapera: Absolutely, and one thing that you can do to make saving easier is you can set up a direct deposit into the account, so you don't even see the money. It doesn't even go into your savings account, so that way you don't even have to think about it, or your checking account.
Maxfield: Yeah, that's smart.
Lapera: So basically the theme of this is get a sense of where you're at with tax liability, make sure you sock some stuff away for retirement, and get excited for the New Year.