published Wednesday, January 4th, 2012

Personal Finance: Take full advantage of retirement savings options

By Chris Hopkins

According to an estimate by the Employee Benefit Research Institute, almost half of baby boomers will have insufficient resources to meet basic retirement needs and uninsured health care costs throughout their retirement.

Perhaps more alarming is the projection from the New America Foundation that a third of future retirees will rely on Social Security for at least 90 percent of their income.

Given the urgency of the savings deficit and the waning of traditional pension plans, it is incumbent upon each of us to ratchet up our own retirement contributions.

Fortunately, Congress enacted some modest changes to the rules governing defined contribution plans in 2006 that incrementally raised limits and deductibility over several years. Here are some important limits for 2012:

* 401(k) Plans. The maximum employee deferral limit is raised to $17,000 from $16,500. Since contributions are deducted before taxes and compound tax-deferred until withdrawal, this should be the principal savings vehicle for most employees with access to a 401(k).

Specific plans may have lower limits; check with your employer to ascertain the maximum for your plan.

An important element of the 2006 Pension Protection Act is the provision for additional elective deferral contributions, or catch-up payments.

If you are 50 or over by the end of the calendar year, you may make additional deferrals of up to $5,500 (again subject to specific plan limits). This is key for those who may have gotten a late start or did not take full advantage of options in earlier years.

As an example of the power of systematic tax-deferred savings (even for late starters), consider a 50-year-old who makes the maximum $17,000 deferral for 15 years, invested at an assumed 7 percent annual rate.

Upon retirement at age 65, this individual would have amassed $427,000 before taxes. By making the catch-up contribution each year as well, the total would reach $565,000. Of course, any available employer matching contribution would compound as well.

* IRA Accounts. Traditional IRA accounts are still available as a supplemental vehicle, even if you are already contributing to your 401(k), subject to certain income limits. For 2012, the maximum contribution to an IRA account is $5,000, with an additional $1,000 catch-up if you are age 50 or over.

Even if you are eligible for participation in a plan at work, your IRA contribution is fully tax deductible provided that your adjusted gross income is less than $58,000 for single filers or $92,000 for joint filers.

Deductibility phases out over the next $10,000 in income.

For those who do not have access to a company plan, IRA contributions are deductible for single filers regardless of income, and for joint filers earning less than $173,000.

The after-tax Roth IRA contribution limit is also $5,000 with a $1,000 catch-up, subject to an income limit phase-in of $110,000 to $125,000 for single filers and $173,000 to $183,000 for couples.

Even if you got a late start, these higher contribution limits and the catch-up provision can go a long way toward erasing the retirement savings deficit.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfree press.com.

Comments do not represent the opinions of the Chattanooga Times Free Press, nor does it review every comment. Profanities, slurs and libelous remarks are prohibited. For more information you can view our Terms & Conditions and/or Ethics policy.
please login to post a comment

Other National Articles

videos »         

photos »         

e-edition »

advertisement
advertisement

Find a Business

400 East 11th St., Chattanooga, TN 37403
General Information (423) 756-6900
Copyright, Permissions, Terms & Conditions, Privacy Policy, Ethics policy - Copyright ©2014, Chattanooga Publishing Company, Inc. All rights reserved.
This document may not be reprinted without the express written permission of Chattanooga Publishing Company, Inc.