Lower your 2011 tax bill - Part 1

Max out your tax-advantaged retirement accounts

A simple yet potentially powerful way to lower your tax bill and save for retirement is to max out your tax-advantaged retirement accounts—such as a 401(k) plan, 403(b) plan, or IRA. Contributions generally are not included in your taxable income for the year, meaning that your tax liability could be reduced by your marginal tax rate, multiplied by the amount of your contributions—for example, 28 cents on the dollar if you’re in the 28% tax bracket.

The 401(k) plan contribution limit for 2011 is $16,500, which could translate into a $4,620 current-year tax savings if you’re in the 28% bracket. And, if you reach age 50 before the end of the year, you can kick in another $5,500 as a “catch-up” contribution. The ability to contribute at this level depends on your income and plan contribution rules.

For IRAs, the contribution limit for the year is $5,000, or $6,000 if you’re 50 or older in 2011. You don’t have to make a contribution before the end of the calendar year, as you do with a workplace savings plan. You can contribute to an IRA for 2011 right up until the tax-filing deadline of Monday, April 16, 2012. Remember, there are income restrictions for deductible contributions into an IRA. The deduction phaseout starts at $90,000 of modified adjusted gross income for couples filing jointly and $56,000 for single filers. And don’t forget about low-cost, tax-deferred annuities as another option because, unlike an IRA or 401(k) plan, there are no annual contribution limits.

Although you’ll have to pay taxes on your workplace savings plan, IRA, and annuity savings when you withdraw them, you’ll potentially have benefited from years of compounded growth.