Tax-Saving Tips to Retirement Plan Participants

According to new research released recently by The Hartford Financial Services Group, Americans age 45 and older with lower incomes worry more about rising taxes than those with higher incomes. At the same time, this group is less likely to participate in a 401k or other retirement plans that could reduce their taxes or provide tax-free income.

Rising taxes were cited as the biggest investment concern by 37 percent of respondents with annual incomes below $50,000, followed by inflation and market volatility, according to The Hartford's 2011 Taxes and Investment Study, which surveyed 750 Americans age 45 and older. By comparison, only 28.5 percent of those with middle incomes (from $50,000 to $100,000) and 32 percent of those with high incomes (more than $100,000) were as worried about taxes.

"Rising taxes can have a bigger impact on Americans with lower incomes, so they are understandably more concerned about that possibility," said E. Thomas Foster Jr., vice president and national spokesperson for The Hartford's retirement plans.

Foster outlines several tax-saving tips for people who worry about rising taxes:

Savers Credit -- Don't miss out on this important tax credit. It provides up to $1,000 for individuals and $2,000 for couples who meet specific income eligibility requirements and put aside money for retirement. For more information, read:

Uncle Sam Wants You to Save for Retirement -- Summary: If you ever feel your finances are too stretched to save for retirement, there could be good news for you. The Saver's Credit -- a little-known tax credit made available by the IRS to low- to middle-income workers -- could make saving for retirement more affordable than you think. It may reduce your federal income taxes when you save for retirement through a qualified retirement plan or an individual retirement account.

Roth 401k -- Consider a Roth 401k for some of your monthly contributions. Contributions are made after taxes but earnings accumulate tax-deferred and withdrawals are tax-free at retirement. Withdrawals can be taken at any time providing certain conditions are met.

Traditional 401k -- Contributions are made before taxes are paid, lowering your overall taxable income. Earnings accumulate tax-deferred and taxes are payable for both principal and earnings only upon withdrawal.

Matching Contributions -- You should check with their employer to determine whether or not your contributions to a 401k are eligible for matching contributions. For instance, some employers provide a 50 percent match on the first 100 percent of employee contributions up to 6 percent of their income. You don't want to miss out on this "free" money.

Roth IRA -- Investors can contribute up to $5,000 in 2011 or $6,000 if age 50 or older if incomes do not exceed $107,000. Like a Roth 401k, contributions are made with after-tax money, earnings accumulate tax-deferred and withdrawals are tax-free at retirement, if certain conditions are met.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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