IRA Updates and Retirement Plan Reminders for 2009
by Cathy Pareto, MBA, CFP® – January 2009
It’s a new year and a perfect time to recap some important tax law changes and updates as they pertain to retirement accounts. Here are some important reminders you should be aware of as you head into 2009.
It’s Tax Time—have you funded your IRA?
Did the financial turmoil of 2008 distract you from funding your IRA last year? Who can blame you? Not to worry–it is not too late to fund your IRA for 2008, as the deadline for doing so is April 15, 2009 for most individuals. You may contribute 100% of compensation, up to $5,000 for 2008, plus an additional $1,000 if you were over 50 years old in 2008 (known as the “catch up” contribution). While a $5,000 deposit might not seem like much in funding your retirement goals, over time and with the magic of compounding, those annual contributions can add up to quite a bit of money. Consider that a contribution of $5,000 each year for twenty five years, assuming a moderate rate of return of 6%, this totals $274,322. While you are at it, instead of waiting until the 2009 tax season to fund IRAs, you should consider making your 2009 contributions now. Of course, you don’t have to fund it in one fell swoop. Instead, you make your annual contribution by spreading it over a 12-month period. Making a monthly contribution of $416 instead of a lump-sum contribution of $5,000 might be more manageable.
Did you Know?
You may not realize this, but the IRS now allows taxpayers to split their tax refunds between up to three accounts. What a great opportunity for individuals to fund their IRA’s with this money! For taxpayers interested in conducting a direct deposit of their tax refund into more than one account, be sure to file IRS Form 8888 along with your tax return and should make sure that the IRA account is opened before filing the tax return. It’s worth nothing that if the contribution is intended to be for 2008, the return should be filed early so your refund to be credited to the IRA before April 15, 2009 considering deposits credited after that date cannot be applied to 2008.
Required Minimum Distributions Suspended for 2009
A required minimum distribution, or RMD for short, is the amount of money that retirees age 70½ and older are required to withdraw from their tax-deferred plans such as IRAs and 401(k)s. The only exception to the RMD beginning at age 70½ is for those who are still working for the company where they have a retirement savings account (e.g., 401(k) or 403(b) plan). Such distributions are required every year, and failure to comply with this rule can lead to big penalties. The penalty for not withdrawing the proper amount is a 50% excise tax on the amount not distributed as required. Of course, taking money out of your retirement accounts when the markets have beaten down your account values is not very enticing, especially considering the tax consequences of your withdrawal. As such, Congress waived the RMD’s for 2009 as part of the “Worker, Retiree, and Employer Recovery Act of 2008”, which was signed into law on December 23, 2008. This RMD suspension only applies to 2009 and to IRA owners (including inherited IRA’s) and retirement plan participants, with the exception of defined benefit plans. In 2010 the RMD requirements will resume.
Retirement Plan Limits Increased
In 2009, salary deferral plans such as 401(k)s, 403(b)s, 457(b)s and SIMPLE IRAs will provide opportunities for larger contributions. The salary deferral (employee contribution) is now limited to $16,500 (up from $15,500 in 2008) plus a $5,500 catch-up contribution for individuals who are at least age 50. The limit for SIMPLE IRAs has been bumped up to $11,500 plus $2,500 catch-up. So, if you plan to take advantage of these higher limits, be sure to check with your HR contact to revise your payroll deductions. The sooner you do so, the better.
In addition, the maximum annual total contribution, including employer contributions (i.e. profit sharing plans) to defined-contribution plans will rise to $49,000 per participant from $46,000.
Schoolteachers, college professors and hospital employees should be keenly anticipating big changes in their retirement plans that take effect in 2009. The Internal Revenue Service issued new rules that will radically reshape 403 (b) retirement plans, which are commonly offered at schools, colleges, and other nonprofit organizations. The long-awaited rules will make 403(b) plans act more like 401(k) plans, which are in the private sector. 401(k) plans have historically required greater oversight of plan costs, investment choices, fund expenses and fiduciary responsibility on the part of the employer and financial providers. Under the new rules, employers will have to increase their oversight as sponsors of the plans, and will be required to provide participants with much clearer information about them. Participants in the plans might see more investment options, with the potential for lower costs and higher returns. This puts the pressure on plan providers (ie. the University plan Trustees) and big mutual-fund companies may displace insurance and other firms as the chief administrators of the plans. By and large, insurance companies have dominated the retirement plan space and have often subjected plan participants to costly investment choices and high commissions.