by Dan Wiener | April 3, 2007 5:43 am
Your individual retirement account, the tax-deferred savings vehicle known more commonly by its terror-inducing acronym IRA, continues to
improve in 2007 and will do so for several years to come.
The tax law, which took effect on January 1, 2002 (and was made permanent with this year’s Pension Protection Act), has enabled investors
to contribute more money to their IRAs, Savings Incentive Match Plan for Employees (SIMPLE), and 401(k), 403(b) and 457 plans for several years
now. This year is no exception.
As I’m sure you’re well aware, the pre-2002 limit was set at $2,000 a year for IRAs, $6,500 a year for SIMPLEplans and $10,500
a year for 401(k), 403(b) and 457 plans. Well, the limits keep going up. They are now $4,000 for IRAs, $10,500 for SIMPLEplans and $15,500
for the 401(k), 403(b) and 457 plans.
Will these increased contribution limits make a difference?
Without a doubt. Remember that every additional dollar you add to a tax-deferred account is a dollar that can compound on itself—and
on its gains—for as long as you keep it within that tax-avoiding wrapper. I’m a big believer in retirement savings plans, contributing
the maximum to my own 401(k) as well as my IRA.
Catch-Up Contributions
As if the opportunity to increasingly save more of your hard-earned dollars for retirement weren’t good enough news, the fact that folks
age 50 and older can save even more is icing on the cake.
For us “oldsters,” we can now contribute an extra $1,000 a year to our IRAs in 2007, for a total of $5,000, and the numbers are
even higher for other retirement plans. So for those of you who are younger than me and turning 50 in 2007, as well as my peers, take advantage
of the option. And if you didn’t do so in 2006, you still have until April 15, 2007, to make the most of this fantastic option.
In fact, if you don’t think you’ll have the full amount to contribute for 2007 available right away, make sure you take advantage
of the maximum 2006 contribution limit before adding money for 2007. This way you won’t lose the option should a sudden spot of financial
luck or a raise give you additional money later in the year that can be contributed to your tax-deferred account.
There is one catch to these catch-up contributions, however: companies are not required to allow you to make them, so make sure you visit
your Human Resources or employee benefits person and tell them that you want your company to permit these payments. Companies would be foolish
to prevent it, since they are very wary of liability issues surrounding employees’ retirement plans. And, quite frankly, any company
or benefits department that hasn’t caught up with the catch-ups by now should have its director tossed out for not staying on top of
this great option.
Introducing Roth
Anew flavor of 401(k) was introduced in 2006: the Roth 401(k), so named because, like a Roth IRA, your contributions are made with after-tax
income, rather than pre-tax, but distributions during retirement are completely tax-free.
There are some rules, of course, such as the requirement that your Roth 401(k) be held at least five years, etc., but nothing too onerous.
Unlike a Roth IRA, anyone, regardless of income level, can contribute to one. (Yes, there’s a Roth 403(b) option as well.) This new type
of 401(k) was also made permanent by the aforementioned Pension Protection Act.
The Roth 401(k) is a great retirement savings plan for many investors, assuming their companies offer them. For one, Roth 401(k)s actually
help to increase your savings since you are, in effect, pre-paying taxes on your income now, and will not pay taxes on any increase in the
account’s value when withdrawals begin. Also, since you don’t know whether your tax rate will be higher or lower in retirement,
the Roth offers a good “tax diversification” move for those who already have substantial regular 401(k) savings.
If this sounds like an option that would be beneficial for you, I encourage you to do a quick Google search for news articles with the term “Roth
401(k)” to brush up on the ins and outs of the plan. You can also check to see if your company has any brochures in its benefits office,
if the option is offered. This could be a real winner for retirement savers.
But whatever your age, whatever your income level, please make your 2007 contributions now, rather than later. And if you still haven’t
done all you can for 2006, do that first. The stock market is still in growth mode, and I’d rather see your money working for you as stocks
rise, rather than watching all the action from the sidelines.
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