Financial Symmetry News & Views

Posts Tagged ‘Roth 401k’

Have you made your 2009 Roth IRA contribution?

If you have not yet made the maximum contribution, you still have time!  Tax payers have until April 15^th of 2010 to make their Roth contributions for the 2009 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.  For 2009, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2010 contributions, contribution limits for this year have stayed the same.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Article published on FiLife.com by Financial Symmetry’s Allison Berger.

In the current economic environment employers are evaluating all of their cost cutting options. In many cases this may lead to suspending or reducing their 401k match.

For employees of such companies this should prompt an evaluation of their current savings strategies. One of the golden rules you will hear in financial planning is that you should, at the very minimum, contribute enough to your 401k to receive the employer match because this is “free money.”  However, when the matching program is suspended, this no longer holds true.

Some questions you should ask yourself when deciding if you should continue contributing to your 401k plan are:

• How would I use the additional money in every paycheck?

• What other savings strategies should I utilize?

• What would be the tax implications of discontinuing contributions?

This first question is key because part of the attraction of 401k deferrals is that they make retirement saving automatic, eliminating the opportunity to spend those funds rather than save them. This has become increasingly important in modern society with the reduced availability of traditional pension plans to cover our retirement needs.  Without the automatic deferrals from your pay check, it will be important to establish other savings strategies to continue funding your retirement goals.

This leads us into questions 2 and 3, which are intricately related. The appropriate retirement savings strategies will rely heavily on your income level and tax bracket. You should evaluate what your adjusted gross income would be with and without your current 401k contribution. Before eliminating your deferral altogether you will want to make sure that this will not push you into a higher tax bracket, since traditional 401k contributions are made pre-tax. If you are in a low tax bracket then you may want to consider contributions to a Roth IRA instead of your 401k since withdrawals from that account will be tax free in retirement. As a result of lay offs and pay cuts over the past year, some individuals may now be within the income limitations to make Roth contributions when they were not in the past. This option should be analyzed as well.

For most employees a combination of some level of 401k and IRA (Traditional or Roth) contributions make sense. Seek the guidance of your financial advisor to help you evaluate your options when faced with a 401k match suspension.