Contributing the maximum you’re allowed to an employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, is likely a smart move:
- Contributions are typically pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the new 3.8% Medicare tax on net investment income.
- Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
- Your employer may match some or all of your contributions pretax.
For 2013, you can contribute up to $17,500 — plus an additional $5,500 if you’ll be age 50 or older by Dec. 31.
If you participate in a 401(k), 403(b) or 457 plan, it may allow you to designate some or all of your contributions as Roth contributions. While Roth contributions don’t reduce your current MAGI, qualified distributions will be tax-free. Roth contributions may be especially beneficial for higher-income earners, who are ineligible to contribute to a Roth IRA.