Good Retirement Planning News

Changing the Social Security program continues to be a hotly debated topic.  Some politicians want to make major revisions with individuals having the ability to manage a portion of their Social Security tax dollars.  Others advocate increasing the tax rate, increasing the level of income subject to Social Security tax, increasing the retirement age (even more), changing the way benefits are adjusted for inflation or some combination of these things.  Others claim there is no crisis and want to delay doing anything.

It promises to be a lively political debate.  As a practical matter, our influence over what ultimately happens to Social Security is limited to expressing our opinions to our elected representatives.  Also, as a practical financial matter, Social Security benefits alone are not large enough to provide most Americans with the income needed for a financially secure retirement.  The average monthly retirement benefit for a worker for 2009 is only $1,153 and the maximum monthly benefit for a worker at full retirement age for 2008 is $2,323.

However, there are actions you can take now to significantly increase the amount of money you will have for your retirement.  The good news is that the limitations for contributions to retirement plans and IRAs have increased and are scheduled to increase even more in the future. 

IRA contribution limits
For many years, the maximum allowable contribution to an IRA was $2000.  The 2001 Tax Law increased the contribution limits.  For 2009, everyone can contribute up to $5000 of their wages to a regular IRA.  In addition, if age 50 or over, you can make an additional “catch-up” contribution of $1000 for 2009.  The contributions are tax deductible if you do not participate in a company sponsored plan or if your income is below certain thresholds. 

As an alternative, you may want to consider a Roth IRA.  There are income restrictions for Roth IRA eligibility and contributions are not deductible, but retirement distributions are not subject to income tax like those from a regular IRA and there is more distribution flexibility.

New 401(k) plan limits
The news for participants in employer sponsored 401(k) plans is even better.  The annual employee deferral limit for 2009 has increased to $16,500 with an additional $5,500 that can be deferred if the participant is age 50 or over.  In addition, the overall limit (the total of employer and employee contributions) is now $49,000 ($54,500 for those ages 50 and over) up from $30,000 as recently as 2000.  These increased contribution limits, the potential for employer matching of some of the employee deferral, the reduction in current income taxes from the contributions and the tax deferred earnings within the plan make 401(k) plans an ideal retirement planning tool.

The money that will support you once you retire is mostly based on your actions.  While everyone would like to have larger Social Security benefits, Social Security alone is probably not going to enable you to live the retirement you want.  Taking full advantage of the higher contribution limits for company retirement plans and IRAs is something you can control.  Taking actions now can help you enjoy the retirement of your dreams.