Retirement Account Catch-Up Rules

May 22nd, 2008  |  Published in 401K, IRA  |  Comments Off on Retirement Account Catch-Up Rules

Catching up is hard to do, unless you’re talking retirement savings and you have the power of the US Government behind you. The contribution limits for various retirement accounts are increased if you are over the age of 50 and you can use them to your advantage if you didn’t contribute as much in your younger days. Below is a table listing the contribution limits for each account as well as the catch-up amount for the 2008 tax year.

Account Type2008 LimitCatch-Up Amount
401(k), Roth 401(k)$15,500$5,000
Trad. IRA, Roth IRA$5,000$1,000

So, if you’ve considered increasing your contributions to either account, know that you have a little extra breathing room if you want to contribute more and “catch up.”

What Is The Roth 401(k)?

May 8th, 2008  |  Published in 401K  |  1 Comment

You may have heard about the Roth 401(k) and the Roth IRA and wondered, what is the difference and why is this guy Roth putting his name on everything? To be fair, the guy Roth was Former Sen. William V. Roth Jr. (he passed away in late 2007) and he was the man most responsible for the original Roth IRA. The Roth 401(k) was merely taking the Roth IRA and applying it to the 401(k), thus creating a regular/traditional 401(k) and a new Roth 401(k).

The Roth 401(k) works like the Roth IRA, your contributions are post-tax and your disbursements are tax free. You can take early payments but you pay taxes on the proportion of the withdrawal that is “appreciation” equal to 10% plus your marginal tax rate.

Contribution Limits

The contribution limit is $15,500 for those under 50, with an additional $5,000 catch-up addition for those over 50, in 2008. This contribution limit is shared between the regular 401(k) and the Roth 401(k), which means the sum total of contributions to both plans cannot exceed the annual limit of $15,500 or $20,500. Another wrinkle to the rule, that is often never an issue, is that the sum of employee and employer contributions have to be less than the employee’s total salary or $46,000, which ever is smaller. (another wrinkle is that employer contributions are pre-tax, so they sit in the traditional 401(k))

Rolling Over

When you leave your employer, you can roll over your Roth 401(k) into a Roth IRA just as you would a 401(k) into a Traditional IRA.

Of my two former employers, only one had instituted the Roth 401(k) so adoption has been slow. Most employers don’t want the added administrative burden of operating yet another defined contribution plan.

Identify Year of IRA Contributions

April 11th, 2008  |  Published in IRA  |  1 Comment

April 15th is right around the corner and many of you will be making your 2007 IRA contributions right now, that’s great news. Putting money away into a Roth or Traditional IRA is one of the best ways you can save for your retirement, so kudos to you for doing it.

Many brokerages and mutual fund firms are now allowing online ACH transactions and through the menu system you can identify which year the contribution is for. For those who still mail in checks, it’s crucial that you identify the year, which is as simple as putting “2007 IRA Contribution” in the Memo line.

What happens if you forget and your 2007 contribution is listed as a 2008 contribution? What if the brokerage misses the line and puts it into 2008? Not a problem, simply write them a letter and have them “re-characterize” the contribution from a 2008 to a 2007 contribution and you will be okay.

Always double check to see if the brokerage characterized it correctly, you don’t want to discover it next April!