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On money

Can't save max? Save what you can

Published January 29, 2006

Ever wish you could take full advantage of the retirement savings opportunities the government offers us? I do each year when I get my W2 form and see how much I'll be paying in taxes on income I theoretically could have sheltered in the Times' 401(k).

Yes, I save diligently, but not nearly as much as the IRS would let me. This year we're allowed to save even more than we could last year - up to $15,000 apiece in workplace retirement savings plans such as 401(k)s, plus an extra $5,000 for a "catch-up contribution" if we're 50 or older.

In addition, we can make a 2006 IRA contribution of $4,000, plus $1,000 for catchup. I calculate that my husband and I could salt away a combined $50,000 in retirement plans this year with the IRS' blessing, not counting $9,000 for 2005 IRA contributions, which can be made until April 17.

Sadly, those numbers are well beyond the realm of possibility for me and most other workers. Even if we're super savers, we have to eat, pay for transportation and a roof over our heads, not to mention tuition and health care costs and my Gator football tickets.

But the fact that we can't hit the max doesn't mean we should forget about taking advantage of the benefits the government offers us.

My own rule of thumb is that each of us should be stashing 10 percent of our income in some type of retirement savings plan. Start young, do it for a working lifetime and you'll end up with a nice nest egg. If you can't even do that, start at 5 or 6 percent, and bump it up a percentage point each year.

The proliferation of retirement plans and IRAs has made the choices confusing for some. Here's my simple solution:

If your workplace plan includes employer contributions, do whatever the plan requires to get them. Many plans will match contributions up to a certain percentage (6 percent of salary is common). If your plan is reasonably good and you like to keep things simple, then that can be a great place to do all your retirement saving. As a bonus, your contributions will be deductible and reduce your taxes each year.

But if you want to do something else, my favorite option is the Roth IRA. In fact, I made a 2005 Roth contribution last week (yes, I'm a year behind). Although increasing my 401(k) contribution would lower my taxes now, the Roth gives me the promise of tax-free income when I withdraw the money. I like that because I think higher tax rates are in our future; Medicare costs alone make it inevitable.

I save up our household's annual Roth contributions through weekly payroll deductions that flow into a credit union savings account. Another way to accomplish the same thing is to set up monthly automatic payments from a checking account, a plan some mutual funds and brokerages offer.

A Roth is an option if your income is less than $110,000 (single) or $160,000 (married filing jointly.) If you make too much to qualify for a Roth, you can contribute to a traditional IRA, but won't get a deduction unless you aren't covered by a retirement plan at work. For traditional IRAs, nondeductible contributions only make sense if you think you'll be in a lower tax bracket at retirement or you need the protection from creditors IRAs offer. A taxable brokerage or mutual fund account is the alternative.

Whatever your method, and whatever your personal max, I hope you'll get started.

I took care of an elderly lady for eight months and received a total of about $3,500. She passed away, so how can I claim this on my income tax since there is no one to give me a W2 form?

Call the IRS for help (1-800-829-1040). You will need to complete a Form 4852. Be sure to do this if any income taxes or Social Security taxes were withheld from your paycheck.

Can I live on a boat as a primary residence and deduct the taxes and interest I pay on the loan for the boat?

Yes. Interest on a loan on a boat, trailer or RV is deductible if it's either your first or second home and it has sleeping, cooking and toilet facilities.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified January 26, 2006, 18:38:02]

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