Best retirement moves this year
If funding caps seem out of reach for you right now, make sure to at least pack away enough of your earnings to trigger so-called matching funds. These are free contributions employers make to 401(k) plans on employees' behalf, as long as those workers save a minimum amount. Generally, most companies require individuals to save 6 percent of their salary to receive matching funds, according to Profit Sharing/401(k) Council of America, or PSCA.
Employers are increasingly offering Roth 401(k) plans, a twist on the 401(k). With a Roth 401(k), contributions are made with pay that's already been taxed, so you won't be taxed at a later date. For this reason, experts say they're a good choice for employees with lower salaries or anyone else who expects to pay higher taxes in the future.
Make IRA contributions
When you fund an IRA, whether traditional or Roth, you aren't just putting money aside, you're capitalizing on a chance to let your assets grow without being eroded by taxes. With a traditional IRA, earnings grow tax-deferred, meaning you pay the folks at the IRS only when they're taken out, usually at retirement. Plus, depending on your income, you may also qualify to claim tax deductions for any contributions you made to the plan. A traditional IRA allows an annual contribution of up to $5,000 per person, or $6,000 for those over 50.
With a Roth IRA (contributions already taxed), you do not pay taxes on earnings. Because there's no required date to start taking withdrawals, you can fund a Roth for as long as you like. It can even be passed along to your heirs, untouched. That's not true with a traditional IRA or 401(k). To qualify for a Roth IRA in 2008, a married couple filing a joint return can not have income that exceeds $169,000. For a single person, the limits max out at $116,000.
Don't forget a nonworking spouse
A nonworking spouse is also eligible for an IRA and can add to your retirement bundle. "Opening an IRA for a nonworking spouse is good tax planning as well as retirement planning," says Dee Lee, a Certified Financial Planner. "Money in that IRA will compound tax-deferred."
"If this is in a Roth, it will
all be tax free forever," says Ed Slott, an
IRA expert and author of "Your Complete Retirement
Planning Road Map." For that reason, Slott
says, the Roth IRA wins hands-down when it
comes to picking an IRA for anyone, whether
they work or not.
Do your financial housekeeping each year
Reallocating your assets to stay on track may seem daunting. But if you don't tend to this financial housekeeping at least once a year, retirement funds may inevitably grow out of whack
You'll want to make sure that you own the right mix of stocks, bonds, mutual funds, cash and other assets to help meet your retirement goals. As the economy and your personal situation may very well change each year, you'll want to regularly assess your needs and strategy.