How to save more and invest smart

If your employer offers a matching contribution to your workplace retirement plan, aim to contribute the maximum allowed ($15,500 to a 401(k), 403(b) or 457 plan with a catchup contribution of $5,000 if your age 50+). Then, look for additional ways to save for retirement.

Target tax benefits as a priority

Look for ease, convenience and control — other features that can make it easy to start additional investing strategies and help you continue to invest long-term.

Add an IRA

No matter how much you contribute to your employer's plan, you and your spouse may be eligible to build additional savings through a tax-deferred IRA. You can contribute up to $5,000 annually to a Traditional IRA. And if you're eligible, consider a Roth IRA for the special benefits it offers—tax free income after five years and after age 59 1/2 plus no required minimum withdrawals in your lifetime.

Consider tax-deferred annuities

Annuities are insurance company contracts that may be used to build additional retirement savings. The money you invest goes to work for you tax-deferred, and you can continue to add to a tax-deferred annuity well beyond the age limit for contributing to other types of retirement accounts. If you plan to work beyond age 70, and family genetics have told you that you might have a long life expectancy, a tax-deferred annuity may offer special advantages.

Two types of tax-deferred annuities

A variable annuity is like a mutual fund, offering access to different types of investments. Your return is based on the performance of the "portfolio" you select.
A fixed annuity offers a guaranteed return that is typically in line with the current short-term savings rate.

A word of caution

Annuities are not for everyone. Your time horizon should be at least ten years. And, you should have exhausted all other tax-deferred savings opportunities before you consider an annuity. It's also important to know what to look for when you buy an annuity. Avoid annuities that charge a surrender fee (if you change your mind about your purchase) and/or an annual fee of more than 1.0%.

You can buy an annuity with a single 'lump-sum' payment,. However, most investors choose to add to their annuity on a regular basis—often monthly, just as they would with an automatic investment plan for mutual funds..

At retirement, you can convert your tax-deferred annuity into an income annuity and choose to receive income for your lifetime or for a fixed period of time. The amount of income you receive depends on which option you choose.

Taxable savings

Once you have maximized your investments in tax-deferred accounts, consider building additional investments in a taxable account.

Here are two strategies:

Focus on stocks and stock mutual funds, which have the potential to gain value through capital appreciation and may also pay regular dividends. If held for more than one year, any gains are subject to capital gains tax which is currently a maximum of 15% and dividends are currently taxed at 15% (compared to withdrawals from a tax-deferred account, which are taxed at your current federal income tax rate.). Of course, tax laws change frequently so it's a good idea to review your strategy from time to time and to seek counsel from a tax professional.
Build an emergency fund in a taxable account, and start as soon as you can. During your working years and emergency fund can help if you are temporarily unemployed or you encounter unforeseen financial expenses. You could use a money market fund for an emergency fund because of the stability and liquidity it offers.

Contribution limits

In 2008, you're eligible to contribute up to $5,000 to a Roth IRA if your modified adjusted gross income does not exceed $159,000 if you're married filing jointly or $101,000 if you're single.

You can make a partial contribution if your modified adjusted gross income does not exceed $169,000 (married filing jointly) and $116,000,(single).

After age 50, you can contribute up to $6,000 to a Roth IRA if you meet these income eligibility requirements. Contributions to a Roth IRA are not deductible.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.