This is how much you can save without breaking the rules

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This is how much you can save without breaking the rules

Saving more money is a fine financial goal. But what if you're an overachiever? What if you want to save so much money you brush up against a legal limit?

For the most part, saving for long-term goals, like retirement, comes with tax advantages. You can contribute to a traditional individual retirement account or 401(k) tax-free because the government wants to encourage people to build a nest egg. But there are limits to this encouragement. The IRS caps tax-free contributions to many accounts and penalizes people who save more.

"The limits exist primarily so that wealthy individuals don't take advantage of these plans and defer too much of their income in any given year," said Kaleb Paddock, a certified financial planner in Colorado.

Maxing out your savings is a lofty but worthy goal, not only because it can help you retire comfortably in the future, but because it can lower your taxable income in the present. Here's how much you need to set aside each year to do it.

How to max out your money

Retirement accounts

401(k), 403(b) and other employer-provided plans: You can contribute up to $19,000 of your wages in 2019. People who are 50 or older can make up to an additional $6,000 in catch-up contributions. Excess contributions count as taxable income and are also taxed when they're eventually withdrawn.

Individual retirement accounts: You can contribute up to $6,000 in 2019, or $7,000 if you're 50 or older. Contributions to a traditional IRA are tax-free; contributions to a Roth IRA are not. There are income limits for Roth contributions. For example, a single person making more than $137,000 a year can't contribute to a Roth IRA. Excess IRA contributions are taxed at 6% a year. (Learn the differences between Roth and traditional IRAs, and how to open one.)

Simplified employee pension IRA: You can contribute up to 25% of your compensation or up to $56,000 in 2019, whichever is lesser, to an SEP-IRA. These accounts are popular among self-employed people. Excess SEP-IRA contributions face a 6% tax.

Health plans

Many employers offer ways to use tax-free dollars to pay for qualified medical expenses not covered by health insurance. These have limits too.

Flexible spending arrangements: You can contribute up to $2,700 in 2019. You have to spend your FSA money by the end of the plan year or lose it, though some employers let you roll over up to $500.

Health savings accounts: Individuals with high-deductible health plans can contribute up to $3,500 in 2019, while families can contribute up to $7,000. Excess contributions to an HSA are also subject to a 6% tax. (Learn how an HSA can help you retire.)

How to save more

Setting aside $19,000 a year for retirement might be an intimidating goal for some people. If you can't save that much now, you can still start on the path. Start by setting aside a percentage of your paycheck for your retirement account rather than a fixed dollar amount, said Paddock.

If you decide to contribute 10% of your $60,000 salary to a 401(k) and get a $10,000 raise, you'll automatically increase your annual retirement savings from $6,000 to $7,000. You may want to gradually increase the percentage you save each year as well. If you get a bonus, plan to contribute some or all of it to your retirement.

Many employers match 401(k) contributions up to a certain amount. If you can't max out your savings on your own, at least try to meet the employer match — it's basically free money.

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Image: Sean Locke