5 Ways Retirement Tax Breaks Will Change in 2011

Earlier in the week the IRS announced the adjustments to pension plan limitations in 2011, which will have an impact on a handful of retirement plans popular among American taxpayers. US News.com put together a list of the top five retirement tax breaks that will be affected by the IRS' recent announcement. You can find a few items from their list below, or the full text here.

401(k)s. The savings limits for employer-based retirement accounts are not increasing next year because inflation was too low to trigger an increase. The cost-of-living index used to calculate increases in 401(k) savings limits is currently greater than it was in 2009, but it is still less than the measurement for the third quarter of 2008. The maximum amount investors can contribute to 401(k)s will not be raised until the September inflation measurement climbs above where is was in 2008. Contribution limits cannot be reduced under current law.

Traditional IRAs. Certain income ceilings determine who is eligible for a tax break for contributing to an IRA. Individuals who have a retirement plan at work can contribute the full amount to an IRA until their modified adjusted gross income (AGI) reaches $56,000. The amount eligible for tax deferral is then gradually phased out until income reaches $66,000 in 2011, the same amount as this year. However, married couples filing jointly will get higher income limits next year. For a spouse who participates in a retirement plan at work the income phase-out range will be $90,000 to $110,000 in 2011, up from $89,000 to $109,000 this year. For IRA owners who do not have access to a retirement account at work, but are married to someone who does, the deduction will be phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000 this year.

Roth IRAs. More high income retirement savers will be eligible to make Roth IRA contributions next year. Married couples filing jointly can contribute to a Roth IRA until their AGI reaches between $169,000 and 179,000 next year, up from $167,000 to $177,000 in 2010. The AGI phase-out range for singles and heads of household will increase from $105,000 to $120,000 this year to between $107,000 and $122,000 in 2011.

Saver’s credit. The AGI limit to get the saver’s credit will be $56,500 for married couples filing jointly in 2011, up from $55,500 in 2010. For heads of household the income limit will increase from $41,625 this year to $42,375 in 2011. Single people and married individuals filing separately can earn up to $28,250 and still get the saver’s credit, up from $27,750 this year.

Continue reading at US News.com...

How Much of My Savings Should Go to Annuities?

Prioritizing your income and deciding how much should go where can be difficult, especially in today’s economy. One of the toughest decisions many Americans face is how much of your savings or 401(k) should go towards annuities. CNN Money.com recently published an article on this topic, in response to a question from an Ohio taxpayer. You can find a section of their answer below, or check out the full text at CNN Money.com.

Question: What portion of my 401(k) and savings should I move to annuities? -- Jack S., Alliance, Ohio.

Answer: That depends. Many annuities have such onerous fees and other drawbacks that you're better off avoiding them altogether.

There's one type, though, that I've long believed can play a useful role in some retirement portfolios. I'm talking about immediate income annuities, where you turn over a lump sum to an insurance company and in return receive guaranteed monthly checks for life, regardless of how the economy and markets fare.

But while most people should at least consider devoting some money to such an annuity at retirement, don't assume that buying one is the best move for you.

For one thing, retirees automatically qualify for an immediate annuity of sorts -- Social Security, which provides guaranteed, inflation-adjusted lifetime payments. If you'll be collecting a pension on top of that, you may very well have the assured income you'll need to cover enough of your expected outlays in retirement without an annuity.

What's more, if you have large balances in your 401(k)s and other retirement accounts, you might be able to draw enough from them with little risk of outliving your assets.

Continue reading at CNN Money.com…

Is the 401(k) dead?

Are 401K plans still a good investment vehicle and an adequate way to prepare for retirement? Money Magazine’s Ask the Expert sheds some light on the issue. Here are some of the concerns people have:

• participants aren't particularly adept at investing their contributions
• account balances can get whacked hard during market setbacks
• turning one's 401(k) stash into a lifetime income is a major challenge

However, Mr. Updegrave, who is also the author of “How to Retire Rich in a Totally Changed World: Why You’re Not in Kansas Anymore,” points out that no one has a better alternative. He explains that we might be better off if companies stuck with the check-a-month pension plans that have disappeared in recent decades. Or, maybe we would do better if the government stepped in and guaranteed a retirement check on top of our Social Security. What are your thoughts on these ideas?

No matter what you think, use whatever vehicle you have to save for retirement. If all you can do is contribute to your employer sponsored 401(k)—make a date for yourself in the future and advantage of investing pre-tax dollars and gaining free money in the form of an employer match.
Lastly, Updegrave makes an important recommendation for older adults: You will want to protect your money from downturns in the stock market as you get older by shifting some assets to the less volatile assets like bonds and cash. Take the time to do it.

Read the full article here. Let me know your thoughts on the 401 (k) on Facebook or Twitter.

7 Ways Moms Can Boost Their Financial Security

As Mother’s Day quickly approaches, I thought it’d be a great time to share this article from Klipinger.com with the fantastic moms and women out there. Take your finances into your own hands and take the advice.

1. Schedule a money date with your spouse and talk things out. Many women want their spouses to talk about money issues more, so try starting that conversation yourself! Write out your financial goals together and see whether or not you’re on the same page.

2. If you aren’t saving for retirement already, start. Small amounts set aside now will compound and grow over the years. The earlier you start, the more time your savings have to grow. If you are working, sign up for your company’s retirement plan. Aim to contribute at least enough to qualify for your employer’s match. It’s free money! In 2010 you can contribute up to $16,500 to a 401(k) or other employer-based retirement account, or $22,000 if you’ll be 50 or older by year’s end.

Never cash out your company plan if you switch jobs. Instead, roll the money over to an IRA or new employer plan so that you continue saving and do not get hit with tax penalties.

3. No company or employer plan? Then set up your own retirement account, such as an IRA. If you’re a stay-at-home mom, you can have an IRA so long as your spouse is employed. In 2010 he can contribute up to $5,000 to an account for you ($6,000 if you’re 50 or older) in addition to his own $5,000 contributions. This doubles the tax breaks to you as a couple!

4. Life insurance is always advised. Once you have children it should become a priority so your children do not suffer financially if you’re not around any longer. The rule of thumb? Coverage should equal eight to ten times your annual household income, including any benefits covered by your employer. Buying term life insurance is said to keep things simple and inexpensive. Several hundred thousand dollars’ worth is just a few hundred dollars per year.

Already have life insurance? Remember, you’ll need to re-evaluate your coverage periodically to ensure it still meets your current life circumstances. For instance, you may need more coverage if you have another child but less when the children are grown and out of the house.

5. Write a will. When you don’t have a will, your state’s one-size-fits-all estate plan kicks in and you might not agree with it. The state will also choose the guardian of your children. With a will, you can make these decisions, divide your property and even design trusts for your children for specific purposes. Review your will after the birth of additional children.

6. Make sure you specify a guardian. If you don’t choose a guardian for your children officially, then the choice you informally made with a friend or family member won’t stand up legally. Avoid any hassle or expensive court battle by naming a guardian in your will.

7. Review your beneficiary designations on insurance policies, IRAs, 401(k)s, and other retirement plans such as pension and profit sharing plans at various life stages. The assets in these accounts go directly to whomever you have named as a beneficiary; these are not covered by your will. If you handle these issues now, you won’t have devastating consequences if something was to happen.

Read the full article here.

8 Do's and Don'ts For Your 401k

From MSNMoney.com:

When it comes to saving for retirement and building a portfolio to last a lifetime, most Americans are way behind the eight ball -- and the nine ball and just about every other ball on the pool table.

More than 54% of Americans report that the total value of their household savings and investments, excluding the value of their primary homes and any defined-benefit plans, is less than $25,000, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. What's worse, 27% have less than $1,000 in assets. Just 11% have more than $250,000 set aside.

Yes, those figures include Americans young and old, those just heading into the working world as well as those about to check out of it. But in the main, Americans need to modify their savings and spending patterns to have any hope of enjoying a standard of living to which, rightly or wrongly, they've become accustomed.

It's not rocket science, at least not according to experts. Here are some nest egg do's and don'ts from Hewitt Associates and Merrill Lynch.

1. Participate in your plan

If you're lucky enough to have a 401k at work, contribute to it. That will greatly improve your financial well-being, according to Bank of America Merrill Lynch, which recently introduced a new tool designed to monitor and score the "financial wellness" of 401k plans in general and, by extension, the employees who participate in them.

The new tool looks at four plan-participant behaviors: saving, investing, setting and monitoring retirement goals, and nest-egg preservation. Not surprisingly, savings and investing behavior -- which represent 80% of the overall score -- are the primary drivers of financial wellness.

Get Money Out of Your IRA Early. No Penalty. No Problem.

From MoneyWatch.com:

As April 15th approaches, CBS MoneyWatch is publishing daily tax tips. See the full list here, and be sure to check back frequently for the latest advice from our experts.

When it’s time to take money out of your 401(k) or IRA, the magic number is 59 ½. That’s the age at which you can withdraw money from a retirement plan without handing the IRS a 10% bonus on top of the regular taxes you will owe. Everyone knows that, right?

Judging from the mail I get, everyone does indeed. But what not everyone knows is that the age 59 ½ rule has more loopholes than Tiger Woods’ marriage contract. For most practical purposes, the penalty-free retirement age in a 401(k) is 55, and it can be lower still for an IRA. Early retirement, medical emergencies, job loss, early retirement, college education, a home purchase-all qualify as exceptions that can make your retirement money more available than you thought.

Here’s how it works:

Separation from service after age 55 (401(k) only) your 401(k) money becomes yours without a penalty if you leave your job after age 55. It doesn’t matter whether the departure was your idea or your employers’, or whether you permanently go fishing at that point or find another job the next day. You just need to “separate” from your employer.

Yes, you still have to pay regular income taxes on the money you pull out, but you’d owe those no matter when you took the money. Just be careful not to roll the money over into the 401(k) at your next job (if there is one) or into an IRA. Either move would put you back on the penalty track.

Lower 401(k) Contribution Limits Likely in 2010

Earlier today I came across this new article from Boston.com discussing the likelihood that 401(k) contribution limits might get lowered next year. As the author explains, the main reason for the reduction in contribution limits is because of the U.S. dollar’s poor inflation rate in 2009.

Unless inflation really kicks up in the last few months of 2009, it appears that the amount that working individuals can contribute to their 401(k) will actually go down in 2010. In 2009, individuals under age 50 could contribute as much as $16,500 to their 401(k). Individuals age 50 and older were able to contribute $22,000. In 2010, it looks like individuals under age 50 will only be able to contribute $16,000 to their 401(k). Those age 50 and older will still be able to contribute an additional $5,500 to their 401(k) but the total amount they can contribute will now be $21,500. In addition, the amount one can contribute to a defined contribution plan will also fall -- to $48,000 in 2010.

All of this is happening because inflation is flat. When inflation is not increasing, a lot of things are impacted. Social Security is a big one. After a record increase in benefits last year, there will be no increase in benefits in 2010. Most people are still not aware of this but they really need to be planning accordingly. On the "plus" side, the Social Security wage base is expected to remain unchanged next year. Earnings in excess of $106,800 will not be subject to the 6.20% Social Security tax.

The best course of action? Contribute the maximum amount permitted this year!

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McCain Makes New 401k Proposal

From the CNN.com:

John McCain proposed suspending the requirement that investors begin drawing down their IRAs and 401Ks soon after age 70, his second major economic proposal of the week.

"We must also protect investors – especially those relying on their investments for retirement," McCain told the crowd at a campaign event in La Crosse, Wisconsin Friday.

"Current rules mandate that investors must begin to sell off their IRAs and 401Ks when they reach age 70 and one half. To spare investors from being forced to sell their stocks at just the time when the market is hurting the most, those rules should be suspended."

Earlier this week, McCain unveiled a $300 billion plan for the government to purchase mortgages at full value from banks and directly re-negotiate the terms with homeowners. The plan has drawn criticism from economists and from the Obama campaign, which has charged that it would mean major profits for lenders and saddle taxpayers with the cost.

5 Mistakes That Can Tax Your 401(k)

These day’s it is essential to put into a 401(k), or some other type of retirement plan, if you want to be able to comfortably retire. The problem, however, is that people don’t take the time or effort to fully understand their plan to ensure maximum benefits. "Too many workers set up their 401(k) plan and then just forget about it," claims Glenn Kautt, a financial planner. USA Today.com has an interesting article on the five most common mistakes people make with their 401(k) that can result in a tax liability. The five mistakes include: rejecting free money, loading up on company stock, chasing performance, investing too conservatively, and failing to fine-tune.