Money Girl explains how you can save for retirement besides through a 401(k)
Q. I have a 401(k) at work; however, I can’t max it out because I’m considered a highly compensated employee. What’s the point of this restriction and are there other ways to save for retirement on a pre-tax basis?
A. Certain workplace retirement plans must adhere to annual discrimination rules that can limit the amount of contributions made by highly-paid employees. These rules make sure that the plan offers benefits to everyone and not just the company’s highly paid executives, managers, and owners. Your contributions have been capped because lower-paid workers in your company aren’t participating in the 401(k), or are contributing a smaller percentage of their income when compared to that of higher-paid workers.
After contributing as much as you can to your 401(k), the next place to squirrel away money on a pre-tax basis is a traditional IRA. For 2012, you can contribute up to $5,000 (or $6,000 if you’re age 50 or older).
If you have additional money to put away for retirement, you can use an annuity to invest an unlimited amount of money on a pre-tax basis. An annuity is similar to a retirement plan because you defer taxes until you make future withdrawals.
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