Posted: Monday, January 26, 2004

WASHINGTON (AP) Tax breaks give workers an incentive to save for retirement, and future retirees can start stashing away even more savings this year into accounts sponsored by their employers.

Workers in 2004 can deposit as much as $13,000 in a 401(k) retirement savings account, which allows employees to set aside and invest earnings before paying taxes.

The contribution limit is even higher for workers age 50 and older, who might see retirement starting to approach on the horizon. Those workers can save up to $16,000 in 2004.

Some employers offer to match a portion of money deferred to the account by employees, but workers typically must contribute to the 401(k) to get the match.

''Obviously, if your employer offers the match, you sort of need your head examined not to do that,'' said Jeff Kelson, a tax partner at BDO Seidman.

Recent tax law changes have made it easier for workers to take their retirement accounts with them when they change jobs, even if they move among work in private business, nonprofit organizations and the government.

Contributing to retirement accounts can reduce a taxpayer's tax obligation for that year because taxes are deferred on the contributions and earnings for taxpayers who meet the requirements.

Employer plans that put aside the money before a worker might be tempted to spend it are one of the easiest ways to build a retirement nest egg. Experts who track American saving habits say more workers could take advantage of tax-favored retirement accounts.

''American workers appear to be eternal optimists when it comes to their financial future,'' said Don Blandin, president of the American Savings Education Council.

''This confidence may exist because most workers simply have no idea how much they need to save for retirement, and for many of those workers who do save, they are saving blindly.''

The council, which conducts an annual retirement preparedness survey, has found that 61 percent of workers have not calculated how much money they will need to have saved by the time they retire.

Some workers struggling to save for retirement might benefit from a saver's credit, available through 2006. The credit can be claimed by qualified individuals earning up to $25,000, heads of households earning up to $37,500 and married couples earning up to $50,000. Students, dependents and those under age 18 cannot claim the credit.

If qualified, the taxpayer can get a tax credit worth 10 percent to 50 percent of the first $2,000 deposited into an eligible retirement plan.

Retirement accounts or annuities set up by taxpayers themselves, not through their employers, are typically known as Individual Retirement Arrangements, or IRAs. They have the same limits on contributions in 2004 as in 2003. Individuals can deposit $3,000. Those older than 50 can contribute an extra $500 for a total of $3,500.

IRAs come in several varieties, and individuals should investigate which type is right for them.

The traditional ones allow those who meet certain income requirements to take a tax deduction for money contributed during the year. Taxpayers in some income ranges start to lose that deduction if they also participated in an employer-sponsored retirement plan that year.

Roth IRAs offer no deduction for money deposited to the account, but earnings and withdrawals are tax-free.

IRAs allow you to contribute money up to April 15, 2004, and count the contribution for 2003. That gives anyone who lagged behind in their retirement savings some extra time to catch up.

On the Web:

American Savings Education Council -

Choose to Save -

Internal Revenue Service -

Publication 575 Pension and Annuity Income -

Publication 590 Individual Retirement Arrangements (IRAs) -

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