Year-end retirement moves, Dec. 2011
Wednesday, November 30, 2011
This is always my favorite part of the annual Year-end Money Moves series: the look at moves to make by Dec. 31 to help improve your retirement outlook.
Yes, I love my job. But I hate working. So I want to do all I can now so that I can quit writing for money and start writing more for me (and the hubby and my mother, who'll always read my scribblings!).
The guiding principle of reaching a retirement that you want is save, save and save some more now. And Uncle Sam does his part to get you to do just that.
Contribute at work
I know it's the holiday season and your gift list is long. But you need to be at the top of that list. And one of the best gifts you can give yourself is contributions to your retirement plans.
This includes your workplace retirement plan. If you know you'll be getting a bonus or raise, congratulations! You deserve it.
You also deserve to retire in style, so put that pay hike to work and increase the amount you're putting in your 401(k) or similar workplace plan now. That way you won't be tempted to spend the extra money.
If you'd stopped contributing because you felt that in this economy you needed to have some more liquid cash on hand, consider restarting your 401(k) contributions. If you can put in at least enough to meet your company's matching contribution, that would be great. That match is essentially free retirement money.
And the sooner you contribute, the sooner your funds start earning.
Add to your IRAs
In addition to your work plan, add to your individual retirement account, too.
Yes, you can wait until the April filing deadline. But just like with your 401(k), when you put money into your traditional IRA or Roth IRA, you get more time for the earnings to compound.
The contribution limits for the 2011 tax year are 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 as a catch-up contribution.
Convert to a Roth
A Roth retirement account is great for many folks. And with the $100,000 income limit gone, anyone can convert a traditional IRA to a Roth.
Although you don't get an upfront tax deduction with a Roth, the plan does offer other tax benefits.
Once you turn 59½ and have had the Roth IRA for five years, you won't owe any taxes on distributions.
You can continue making contributions to a Roth for as long as you want, regardless of your age.
And 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; you can leave your Roth money alone to keep growing for as long as you want.
Note, however, that if you convert to a Roth, you'll owe taxes on converted money. Make sure you plan for this. The bump could push into a higher tax bracket so you might to convert just some of your traditional IRA account to a Roth and then convert the rest next year, thereby spreading your conversion -- and tax bill -- over a couple of years.
Also remember that if instead of converting to a Roth you want to open or contribute to a Roth you started earlier, you'll still encounter some income limits.
As a single filer, you can't open or contribute to a Roth unless your modified adjusted gross income (MAGI) is less than $122,000. Married couples' MAGI cap is $179,000. And if you're just slightly under those caps, your Roth contribution amount will be reduced.
Finally, you'll need to answer the big question: Should you convert? Maybe. Maybe not.
But you definitely should evaluate your tax and financial situation to make sure.
Remember your RMD
If you have a traditional IRA or other retirement plan on which taxes are deferred, you'll eventually have to start taking out some of the money.
This is known as a required minimum distribution, or RMD, and it also applies to all employer sponsored retirement plans: profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The distributions also are required from traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The key date is when you turn 70½ (everyone celebrates half birthdays, don't they?). In that year, you'll technically have to take your first RMD, but your initial distribution can be postponed until April 1 of the next year.
The in subsequent years, including the year in you took your first RMD on April 1, you have to take the distribution from your retirement accounts by Dec. 31.
And if you inherited an IRA, the RMD rules apply to you, too.
So don't miss the RMD deadline. You'll face costly penalties if you do.
Open a self-employed retirement plan
Are you self-employed, either full-time or simply doing some extra work on the side? Then you can open and contribute to a separate retirement savings based on those extra earnings.
Many self-employment retirement accounts can be opened for a tax year up until that filing's deadline plus any extensions you might have earned. That means that for 2011's self-employment earnings, you can open a SEP as late as Oct. 15, 2012, as long as in April you got an extension to file your tax return.
However, some other types of self-employed retirement accounts, such as a solo 401(k) or Keogh, must be set up by Dec. 31. You can put off contributing to them until next year, but you've got to have it established in the tax year for which you want to make the contribution.
Wow! After looking at all these year-end retirement moves, I'm ready to retire! But if some of these steps can help you and me clock out of the grind sooner rather than later, then it's worth the effort.
I'll see you tomorrow, when part 4 will look at charitable steps to take by Dec. 31.
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