Saving for retirement just got a little easier
If you’re saving for retirement, the federal government has just given you some good news. It comes in the Economic Growth and Tax Relief Reconciliation Act of 2001 – the recent $1.35 trillion tax bill signed into law by President Bush.
The bill tries to address two serious problems. Americans, and especially baby boomers, aren’t saving enough money to adequately fund their retirements. In general, provisions of the bill raise contribution limits to allow savers to put more money away in IRA accounts and qualified retirement plans – places where investors can see their money grow tax-free until it’s withdrawn.
Perhaps even more important, the bill contains special “catch-up” provisions for people over 50, a critical group nearing retirement age. While investors are pouring more and more money into retirement savings, they should also pay close attention to thoughtful retirement planning.
How and where your money is invested
As retirement assets grow to substantial sums, make sure your investments are as efficient and effective as possible. Are you in a tax bracket that makes tax-free investments more attractive? Are your investments appropriate for your investment horizon?
Based on your investment allocation, are you saving enough for retirement in order to have the lifestyle you hope for? You don’t want to be working at age 70 unless it’s by choice.
Your overall asset allocation
Your asset allocation should be appropriate to your risk tolerance, time frame and investment objective. Consider the level of risk you are taking with your investments. As you get closer to retirement and the need to liquidate assets to provide for retirement income, you may want to move all or a portion of those assets into lower risk categories.
The closer you are to needing the cash, the less tolerance you may have for fluctuations in the value of the asset. If you are relying on the cash from a high-risk asset with a value that fluctuates drastically over short periods of time for example, you may be forced to liquidate it at a time when the value is down substantially.
Tax-smart distributions and rollovers
Once you’ve accumulated a comfortable nest egg, how do you get access to what you’ve saved without giving a big chunk of it to the government in taxes? Make sure you know all the tax implications of distributions from different types of assets especially if you have not yet reached age 59. Certain investments may be better suited for liquidation depending on your particular situation.
Here are other plans to keep in mind:
• Traditional and Roth IRAs – Contribution limits increase from the current level of $2,000 to $3,000/year in 2001 and gradually up to $5,000 by 2008. However, because there’s no change to the adjusted gross income (AGI) limitations, depending on your level of income, you may or may not be eligible to make these contributions.
• 401(k)s and similar plans – Eligible deferrals increase gradually from a current limit of $10,500 to $15,000 by 2006 with indexing thereafter.
• SIMPLE IRA plans – Contribution limits increase gradually from $6,500 to $7,000 in 2002. Further increases to $10,000 will be implemented by 2005 with indexing thereafter.
• Catch-up provisions for those over 50 – Generally, these provisions allow anyone over age 50 to make additional contributions to certain retirement programs over the usual limits.
A word of caution
Don’t plan on these provisions being around forever. This entire tax bill sunsets Dec. 31, 2010. This means in 2011, the tax laws will revert back to the 2001 levels and it will literally take an act of Congress to prevent it.
Planning tips
The good news of the new tax law is good only if you take advantage of these new limits and the key to living the lifestyle you want in your retirement is planning. Whether you have a well constructed retirement plan, or are just beginning to think about retirement, the new tax law changes make it even more important to work with a respected and trusted financial advisor who can help you make decisions that are right for you and your unique situation. Every day you wait to implement and fund your retirement plan, you increase your cost to do so.
(Beth Wells is a financial representative with the Northwestern Mutual Financial Network based in Murfreesboro.)