The single most effective way to boost your retirement account is to put more money in it. And because the federal government offers substantial tax incentives for retirement savings, saving more helps you reduce your tax bill at the same time.
You’ll take full advantage of these tax benefits if you contribute $16,500 to your 401(k) or $5,000 to your IRA in the 2011 tax year. (The limits are even higher if you’re 50 or older.) But those amounts might be more than you can afford given your other financial needs.
Nevertheless, we strongly recommend you contribute enough to your workplace plan to qualify for any matching contribution from your employer – such as a 50 percent match to your contributions of up to 4 percent of your annual salary. Although the matching contribution is free money for employees, many don’t put enough into their accounts to receive it.
2Some tax benefit is better than none
Haven’t made a contribution to your retirement account because you can’t decide between a traditional retirement account and Roth accounts? Don’t agonize. Just pick one and make the maximum contribution.
Both traditional and Roth retirement savings accounts offer tax benefits — they just provide them at different times. In traditional retirement accounts, contributions aren’t taxed, but withdrawals are. The opposite is true for Roth accounts; contributions are taxed, but withdrawals aren’t.
Which type of account is better for you depends on a number of factors, including your tax rate now, your tax rate when you retire, your investment return and how long you will continue to work — factors that are difficult to predict. So don’t pass up on retirement contributions because you’re not sure whether a traditional or Roth is best for you. There is no right answer, so make a reasonable judgment call and start a retirement account.
3 Know thyself
Settle on a general approach to managing the mutual funds in your portfolio. If you’re comfortable with investing, you might want to go the do-it-yourself route — making your own asset-allocation decisions and picking out your own set of mutual funds. If you’re more comfortable delegating investment decision-making to someone else, you can opt for a one-fund solution — a target-date fund or a balanced fund. (More on those shortly.)
4 Think global
If you choose to put together your own portfolio of funds, take a close look at your allocation to international investments. Odds are that U.S. stocks and bonds make up the bulk of your portfolio, even though U.S. securities now account for less than half of the value of world markets. Today, much of the strongest economic growth — and the highest potential returns — is outside the United States.
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