How to Calculate How Much to Put in Tax-Deferred Savings for Maximum Federal Tax Benefit

by Maggie McCormick

To reap the maximum federal tax benefit for your retirement savings, you need to save the maximum amount of money possible. Every year, the government sets a maximum allowable contribution for 401k plans and tax-deferred IRA plans. It's relatively simple to determine how much you should contribute if possible, but it may be difficult to live with the money left over from your salary.

Multiply the maximum allowable 401k contribution by 100. As of publication, this maximum is $16,500 for those under 50 years of age and $22,000 for those 50 and older. If you work for a small employer and have a savings incentive match plan for employees, or SIMPLE, 401k, the amounts are lower -- $11,500 and $14,000, respectively.

Divide this number by your salary. The resulting number is the percentage of your salary that you should request be put into your 401k when filling out your employer's forms.

Factor in an additional $5,000 ($6,000 if you are 50 or older) to contribute to a traditional IRA. You will pay for this separate from your employer using after-tax dollars, but you can take a deduction when you file taxes.

Tips

  • The Roth IRA offers tax benefits as well. You fund it with after-tax dollars and can later withdraw the money tax-free. The downside is that the maximum IRA contribution applies to both the traditional and Roth combined. If you contribute $5,000 to a traditional IRA, you cannot contribute to a Roth. Though you do not get the deduction now, the tax benefits later may make it worth the effort.
  • Employers often match employee contributions to 401k plans up to a certain amount. If you can't afford to contribute the maximum allowed to your 401k, make sure you are contributing enough to gain the full benefit of your employer's contributions.For example, if your employer puts in 50 cents for every dollar you contribute up to 6 percent of your pay, make sure you are contributing at least 6 percent.

Warning

  • Your employer may set lower limits on the amount of money you can contribute to your 401k. In this case, you can reap the maximum federal tax benefit by setting your contribution to your employer's maximum level.

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