Contributing the maximum you’re allowed  under 401k contribution limits 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, the 401k contributions limits came 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 defined contribution plans, 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.

For any questions related to this, please contact Doeren Mayhew’s tax advisors in  Michigan, Houston or Ft. Lauderdale.