How to Make Your Money Last Longer

"Saved more money"

Jane Bryant Quinn | 2/18/2016, 9:18 a.m.
That's the number one response retirees and people nearing retirement give when asked, "Financially speaking, what do you wish you'd ...

That's the number one response retirees and people nearing retirement give when asked, "Financially speaking, what do you wish you'd done differently?" This realization, of course, usually hits most of us after we've blown through Plan A (the retirement fairy who'll magically take care of everything) and Plan B (work till I drop). But since we can't count on our health or our jobs to see us through, those of us who are lucky enough to still be employed should proceed directly to Plan C: Squeeze that paycheck like a sponge to fund our retirement accounts.

Fortunately, the government has bestowed a great gift on all retirement savers, even those nearing the end of their working lives: the tax-favored retirement plan. The contributions to these plans, as well as their earnings, are tax-deferred and even, in some cases, tax-free.

Many people close to retirement see little point in funding these accounts. "Why put money in a retirement plan now?" they ask. "I'll be taking it out in a few years." Two crucial reasons. First, these could well be your highest-earning years, making the tax benefits especially valuable. Second, you'll be withdrawing the funds incrementally, not all at once. You may live another three decades — ample time for your preretirement contributions to grow tax-deferred. So be smart and get those tax breaks while you can.

Gimme (tax) shelter

Tax-favored retirement savings plans come in two types: traditional and Roths. The vast majority are traditional IRAs, 401(k)s and similar plans. The income taxes on your contributions, up to an annual limit ($18,000 in 2016, plus $6,000 for taxpayers 50 or older), are deferred, and the earnings grow tax-deferred as well. When you start withdrawing the money (which you cannot do before age 59 1/2 and must do by 70 1/2, unless you're still on a company payroll), it is taxed as ordinary income. That's the deal: No taxes now but definitely taxes later, when — the assumption goes — you'll likely be in a lower tax bracket.

Roths, on the other hand, are funded with after-tax dollars. But all the earnings grow tax-free, so when you take out the money, it doesn't count as current income and hence is totally tax-free. If you don't need the money, you never have to take it out; a Roth can grow tax-free for the rest of your life and be left tax-free to your heirs. (Another upside: If you do need the money, you can withdraw your own contributions at any age without penalty.)

But the contribution limits for IRAs, whether Roth or traditional, are fairly low: The 2016 maximum is $5,500, or $6,500 if you're 50 or older. There are also income limits, albeit generous ones: You can contribute the maximum if your adjusted gross income in 2016 does not exceed $117,000 or, for married couples filing jointly, $184,000.

Which plan is which?

The type of tax-favored plan you participate in is determined by your employment situation, so there's not much angst around that choice. What is absolutely vital is that you participate in whatever plan you qualify for and sock away as much as you can afford. The money you invest now will be your nest egg later. Here's a quick rundown.