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Reducing Taxes, Pre-Retirement

Make sure you capitalize on all annual catch-up contribution opportunities, including the lesser-known deferred compensation provisions.

Budget cuts have put a lot of pressure on teacher salaries and future STRS pension plans. Consequently, it is important to understand how to put more money aside into 403(b) and 457(b) retirement accounts to make up for the potential retirement shortfalls. Your 403(b) and 457(b) accounts do offer the ability to make extra payments, called annual catch-up contributions which can increase your overall account balance and the amount eligible to be paid out. Importantly, these contributions are generally all pre-tax and grow tax deferred and are based on your years of service, age, and proximity to retirement.

You should also be aware of and take advantage of the traditional IRA and Roth IRA contributions that make the most sense for your particular tax, family, and legacy situation.

While not technically part of your pension benefits, maximizing the amounts of any IRA accounts you might hold is also useful. For example, annual contribution limits in 2012 for regular IRAs and Roth IRAs (certain income restrictions apply) are $5,500. Catch-up provisions let workers 50+ contribute an additional $1,000 per year. That extra $1,000 a year can make a difference. If you squirrel away $6,500 instead of $5,500 each year for 15 years and earn an average 8% annual return, you’ll end up with $190,000 rather than $161,000.* It’s also wise to understand the tax consequences of Roth versus regular IRA. Additionally, Roth IRAs can also be a great way to accumulate money for a child’s education and also give them the best opportunity to qualify for financial aid.

*Rate of return for illustrative purposes only and is not indicative of any particular investment; your results will vary.

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