Flex Your 401(k): Maximize Your Contributions

Editor's note: As a special feature for Feburary, TheStreet.com offers a four-part series on 401(k) plans designed to help you maximize your retirement savings. Today is Part 1. Here's Part 2. Here's Part 3.

Do you have a 401(k) plan? That is one of the questions most frequently posed by prospective employees at job interviews. Increasingly, the answer is yes.

Traditional pension plans have become virtually extinct, at least for new hires. But 401(k) plans, which allow employees to have a portion of their wages paid directly, or "deferred," into tax-advantaged investment accounts, are booming. Employers love them because they shift most of the cost of saving for retirement to employees themselves. Companies can even pass along some of the administrative costs.

The good news is that Congress has preserved higher annual contribution limits that were set to expire in 2010. In 2007, employees can contribute $15,500, and those aged 50 or older can contribute an additional $5,000 for a total of $20,500. Going forward, the limits will be indexed in $500 increments to inflation.

It goes without saying that the most important way you can maximize your retirement income through a 401(k) is to contribute as much as possible. Putting aside just a few thousand more dollars each year can translate into hundreds of thousands of dollars in additional funds by the time you're ready to retire.

"Now, more than ever, people's financial future is in their own hands," says Gary Schatsky, an attorney, CPA and former chairman of the National Association of Personal Financial Advisors. "A 401(k) plan allows a worker to save for retirement while deferring taxes on the saved money and earnings until withdrawal. In addition, it can act as forced savings and be the basis for your retirement future."