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2009 Year-end Money Moves: Retirement

I don't know about you, but I very much look forward to the day I don't have to worry about writing to earn money and can just scribble away about whatever I want. Yeah, that probably will still be taxes, but you know what I mean. 

To be able to do that as soon as possible will take making smart retirement savings moves. So to benefit you and me, today's 2009 Year-end Money Moves feature focuses on ways to enhance our retirement earnings.

Yearend money moves_3_retirement Contribute to your company plan
In these tough financial times, many folks have stopped contributing to their workplace retirement accounts. Some have even felt compelled to raid their nest eggs to cover day-to-day expenses.

We all do what we have to do, but as soon as you can, start putting money back into your 401(k), or 403(b) if you're a public employee. This is especially critical if your company matches a portion of your contributions.

If you don't take advantage of the match by contributing at least enough to get your employer's money, you are passing up free retirement money.

Contribute to your IRA
Similarly, some folks have neglected their IRAs during this economic downturn. It is hard to put money into an account that's gone down in value. But if you are convinced that your investments are the appropriate ones for your retirement goals, the lower share costs mean you're getting a value right now.

For the 2009 tax year, you can contribute up to $5,000 to an IRA, either traditional or Roth. If you're 50 or older, you can put an extra $1,000 into the account.

Convert to a Roth
The advantages of a Roth IRA are well known:

  • Once you turn 59½ and have had the account for five years, you won't owe taxes on distributions. 
  • You can continue making contributions to a Roth for as long as you want, regardless of your age. 
  • You, not the IRS, decide when to take money out. With a traditional IRA, you have to take required minimum distributions (RMDs) when you turn 70½; not so with a Roth.

Folks with higher incomes, however, aren't able to contribute to a Roth account.

For the 2009 tax year, married joint filer with modified adjusted gross income (MAGI) between $166,000 and $176,000 can contribute some, but not the full $5,000 annual amount to a Roth. If the couple makes more than $176,000, they can't contribute at all to a 2009 Roth IRA for 2009.

Single filers face Roth contribution limits if they earn in 2009 between $105,000 to $120,000; earn more than the top limit and you can't put any money into a Roth.

There also is a limit to convert money from a traditional IRA to a Roth. Anyone, single or married, who makes more than $100,000 can't convert their retirement account to a Roth. But that changes next year.

Beginning in 2010, thanks to the Tax Increase Prevention and Reconciliation Act of 2005, any traditional IRA owner will be able to convert that account regardless of income. If you make the conversion next year, you even get a bit of a reprieve on the taxes you'll have to pay on any traditional IRA earnings.

While you'll report the amount you convert on your 2010 taxes, you'll be able to spread any tax due over two subsequent tax years. You can pay half the tax due on the converted money on your 2011 return and the other half in 2012.

Of course, if you're worried that your tax rate will be higher in 2011 and 2012 because of the scheduled sunsetting of the Bush Administration cuts, you can go ahead and pay your full tax bill when you convert to a Roth in 2010.

Open a self-employed retirement plan
If you work for yourself, either full-time or as a side job to supplement your wage income, you can contribute to a separate retirement savings based on your self-employment earnings.

Some types of self-employment retirement accounts can be opened for a tax year up until that filings deadline plus any extensions you might have earned. However, some of these accounts, for example a solo 401(k) or Keogh must be set up by Dec. 31.

Remember RMDs will return
In 2009, the required minimum distributions, or RMDs, that are typically required from traditional IRAs were deferred. This allowed folks to leave money in those accounts, which took a hit when then market dived in 2008. Next year, though, RMDs will be back, so plan accordingly.

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Tax Preparation

The key to saving for retirement is starting early and making a committment. You can never be too young. The tax breaks are just gravy.

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