How to Max Out Your Retirement Accounts in 2014 / Use these strategies to make optimum use of your 401(k) and IRA

Emily Bandon for US NewsWorld Report writes:  Contributing to retirement accounts will allow you to take advantage of tax breaks for retirement savers and employer contributions, as well as capture valuable investment returns on your savings. To take full advantage of all the available retirement account perks, you will need to be able to save a considerable amount of money and invest it in a way that minimizes taxes and fees. Here's how to make the most of your retirement accounts in 2014:

Max out your 401(k). Most workers can contribute up to $17,500 to a 401(k), 403(b) or the federal government's Thrift Savings Plan in 2014. To max out this type of retirement account, you would need to contribute $1,458 per month or $729 per paycheck if you are paid twice per month. For someone in the 25 percent tax bracket, contributing the maximum will save you $4,375 in federal income taxes. Income tax won't be due on your 401(k) contributions until you withdraw the money from the account. The contribution limits are adjusted annually to keep pace with inflation. "Adjust your contributions each year on the 401(k) site, and work with your [human resources] department to make sure that you are maximizing it," says Clarissa Hobson, a certified financial planner for Carnick and Kubik in Colorado Springs, Colo.

Take advantage of 401(k) catch-up contributions. Workers age 50 and older can contribute an additional $5,500 to their 401(k) in 2014, or a total of $23,000. To save this much, you'll need to set your twice-a-month 401(k) contributions to $958 or contribute $1,917 per month. An older worker in the 25 percent tax bracket who contributes the maximum amount can reduce his or her 2014 tax bill by $5,750. Workers in higher tax brackets can save even more. "If you are a high wage earner, every tax deduction you can get is a good thing," says Debbie Price, a certified financial planner and president of Price Planning in Powell, Ohio.

Get employer contributions. In addition to tax breaks, many employers will match the amount workers contribute to the company 401(k) plan. "If you have a company match, I think it's always a good idea to start there," Hobson says. The most common 401(k) match is 50 cents per dollar contributed up to 6 percent of pay. Using this formula, a worker earning $75,000 per year who saves at least $4,500 in a 401(k) plan could get another $2,250 from his or her employer in matching contributions.

Max out your IRA. You can contribute up to $5,500 to an IRA in 2014, which jumps to $6,500 if you are age 50 or older. To max out this type of account over the course of the year, you would need to contribute $458 per month, or $542 monthly if you are age 50 or older. However, if you have a workplace retirement plan, the tax deduction for traditional IRA contributions is phased out for individuals with modified adjusted gross incomes between $60,000 and $70,000 in 2014 ($96,000 and $116,000 for couples). If only one spouse has a retirement plan at work, the deduction is phased out if the couple's income is between $181,000 and $191,000. Unlike 401(k) contributions, which generally need to be made by the end of the year, IRA contributions can be made up until the tax filing deadline, resulting in nearly immediate tax savings on your current return.

Consider Roth accounts. Roth 401(k)s and Roth IRAs have the same contribution limits as traditional retirement accounts, but the tax treatment is different. Instead of getting a tax break when you make the contributions, Roth accounts allow you to pay the income tax at your current rate, which can be especially beneficial for people who are young or in a low tax bracket. Withdrawals in retirement will then be tax-free. "Having that pot of money that has already been taxed and will never be taxed again gives you so much more flexibility in your retirement years," Price says.

Eligibility to make Roth IRA contributions is phased out once an individual's income is between $114,000 and $129,000 in 2014 ($181,000 to $191,000 for couples). But investors who earn more than the income cutoff may still be eligible to convert traditional IRA assets to a Roth. "For those people who don't qualify to contribute to a Roth IRA because of income level, you can contribute to a traditional IRA and turn right around and convert that traditional IRA to a Roth IRA and pay the tax in the current year," says Gregory Zandlo, a certified financial planner and founding principal of North East Asset Management in Minneapolis. "Yes, they forgo a little bit of the tax benefit now, but they give themselves greater financial flexibility by putting money into a Roth 401(k) option."

Get the saver's credit. There's an extra retirement saving tax perk for low- and moderate-income workers who save for retirement. Couples with an adjusted gross income of less than $60,000 ($30,000 for individuals) who save for retirement in a 401(k) or IRA are eligible to claim the saver's credit on their tax return, which can be worth as much as $1,000 for individuals and $2,000 for couples.

Choose low-cost investments. One of the ways money leaks out of your 401(k) or IRA is when you pay high fees on your investments. Choosing low-cost investments will help your money grow faster. "Become really astute in terms of the fees that are being charged in the investments in your plan," Zandlo says. "Even if you are able to save half a percent, over 10 years, that is 5 percent of your money."

Hold high-tax investments in retirement accounts. When you withdraw money from a traditional retirement account, it will be taxed at regular income tax rates, regardless of what the money was invested in. If you are saving in both retirement and taxable accounts, it makes sense to hold investments that are taxed at a low rate outside your retirement account and investments that are taxed at a higher rate within the retirement account.

Don't take the money out too early or too late. Traditional 401(k)s and IRAs have a variety of rules about when money can and should be withdrawn from the account. Withdrawals from traditional retirement accounts before age 59 1/2 typically result in a 10 percent early withdrawal penalty in addition to regular income tax on the amount withdrawn. However, there are some exceptions to the early withdrawal penalty if an IRA distribution is used for higher education costs, a first home purchase (up to $10,000), high medicals costs or health insurance expenses after a period of unemployment. After you turn age 70 1/2, withdrawals from traditional retirement accounts become required. The penalty for missing a withdrawal is 50 percent of the amount that should have been withdrawn.