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Midyear Tax Planning For Those Retirement Plans

BOSTON (CBS) - Mid-year is a good time to take stock of your retirement accounts. The contribution limits for this year for a 401(k), a 403(b) and a 457 plan is $18,000.

And if you are 50 or reach that magic age this year, you can use the catch up provision and contribute an additional $6,000 to your account. Not too many workers are able to contribute the max to their retirement and even less can use the catch up provision.

If you are not contributing the maximum to your retirement account consider increasing your contribution level to at least what your employer may be matching.

Then consider increasing your contribution level every six months or share every raise with your retirement plan. If it's not in your checking account, you are not apt to spend it.

There is a big tax advantage in using your employer's retirement plan. There are no income taxes withheld from the dollars you contribute. You will still owe Social Security and Medicare taxes though on the amount contributed.

While those dollars are in your account, they are growing tax deferred. Tax deferred compounding is the Eighth Wonder of the world. And it truly is a wonderful thing for your dollars will hopefully continue to grow each year and you will not owe taxes on them until you begin withdrawals in retirement.

If there is no 401(k) where you work consider setting up an IRA, Individual Retirement Arrangement. For this year, all IRA contributions are limited to $5,500 and if you are over 50, you can add a catch up contribution of another $1,000 to the account. That's a standard IRA, Spousal IRA, Non-deductible IRA and the Roth IRA.

You must have earned income of at least the amount of the IRA contribution and if you have a retirement plan at work you may not be eligible for a deduction for the IRA.

My favorite IRA is a Roth IRA. You do not get a deduction upfront for the dollars contributed but when you withdraw the dollars in retirement you will not owe federal income tax on the income your money has earned.

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