Take Advantage of Your Tax Advantages

FROM FOOL.COM

Here's a question: If you're contributing to your 401(k), does it mean you're getting the most from your savings? 

The answer is, of course, no. Here's what you need to know to get the maximum advantage from your tax-advantaged accounts -- because there's much more to it than just your 401(k).

Boosting the benefits of your 401(k)How much do you contribute to your 401(k)? 

If you aren't at least getting the full employer match, you're not contributing enough. The employer match is, as is often noted, free money. Think of it as a return on your savings, the kind of return you can pretty much guarantee you won't see anywhere else. That's because, depending on the plan, you're getting up to a 50% or even 100% return on every dollar you add to your contribution. 

So, if you haven't done it already, boost your 401(k) savings to get the full match. 

Your next goal, when it comes to the 401(k) is to work your way up to the maximum deferral. It might sound like an unreachable goal, but with planning you can do it -- and you'll still be getting a killer return from your employer match, even if it phases out at a certain contribution level. 

Start by saving your raises or jumps in income. You don't need to do this forever, but do do it until you're getting the full tax-deferred benefits of your plan. It might seem painful now, but it will feel really good when you're sitting on a significantly larger pot of money later on. 

Don't forget about that IRAIf you're taking full advantage of your 401(k) -- or if you don't have access to a 401(k) -- it's time to think about taking full advantage of an IRA. 

IRA accounts offer the same tax-advantaged benefits as 401(k), just with a lower contribution limit. Even if you have a 401(k), you can still contribute to an IRA, meaning that you have the chance to put aside a full $23,500 this year in pre-tax income (assuming you're using a traditional 401(k) and IRA). 

Don't feel bad if you're not there: these things take time. But keep your eye on the prize and do as much as you can to fund those long-term accounts. The tax benefits are too good to ignore.

Have kids? Start a 529No matter what your child's age, there is probably some part of you that is thinking about college. And college, as we know, is expensive. 

The costs are only rising, which means that it's more and more critical to have some sort of plan in place -- otherwise, your child may turn to debt to finance his or her education, which is starting off life on the decidedly wrong foot. 

A 529 plan doesn't let you contribute pre-tax dollars, but it does allow for tax-free growth and withdrawals for qualified educational expenses. Better still, the contribution limits aren't set in stone in the same way your retirement account contributions are. Different states have different plans with different limits, and you can shop around to find the plans that offer the highest limits. 

Fund your retirement accounts first (you don't want to have to rely on your child to finance your retirement), but take advantage of the immense benefits of 529 savings for your kids. With time and tax-free growth, you can make a huge dent in that college tuition bill. 

CaveatsI haven't included the Roth retirement account options here, where you contribute post-tax dollars but enjoy tax-free withdrawals in retirement. These don't offer tax advantages today, but they're great if you're projecting a much higher income later on.

Another consideration is short-term savings. If you don't have a cushion of highly liquid assets to tap into should something go wrong, you should address that before prioritizing retirement savings. How much of a cushion you need will depend on your lifestyle and needs, but a few months worth of living expenses is a good start. 

From there, the world of tax-advantaged saving is your oyster, and later on you'll be glad to have seized it.