Retirement Contribution Goals for 2008
I plan on doing a full post looking back on my 2008 goals later this month, but for now I’d like to address this one aspect, my retirement contributions. For the first time ever, I’ve reached the maximum contribution level for my 401k. Woohoo!
I’ll admit though that my enthusiasm has been tempered a bit due to the rate of return those 401k contributions have received due to the downturn in the stock market. 2008 was not a fun year to max out.
Anyway, that leads me to the Roth IRA. It’s the next available tax-advantaged retirement account we have at our disposal for the remainder of 2008. It’s been my stretch goal all year to be able to max out contributions to a Roth IRA for Mrs. PT and I. So, I’ve started my research and I’m looking forward to our contributions purchasing investments at such a discounted level.
As an aside, a big motivator for me to get on the Roth IRA train has been the financial goals posts shared by No Credit Needed. Thanks, NCN.
What is a Roth IRA?
The Roth IRA is named after Senator William Roth (DE) and was developed in the Taxpayer Relief Act of 1997. I didn’t realize it was that new. The Roth is a bit different than the traditional individual retirement account, which has been around since 1974. But the concept is the same: encourage retirement savings.
Within your Roth IRA you can have varied types of investments: CDs, Money Market Accounts, Stocks, Mutual Funds, etc. The Roth IRA, like the traditional, is simply a tax-advantaged house for your investments.
Roth IRA Limits and Deadlines
Before you dive into getting yourself a Roth IRA, you need to know your limits. Unfortunately, there are plenty. In 2008, you can only contribute $5,000 (or $6,000 if age 50 and above). However, the deadline to contribute is April 15, 2009 (or the date you file your taxes, if sooner). That leaves me with around 4 months to reach this goal.
There are also income limits. At 101,000 (single) or 159,000 (joint) modified adjusted growth income your contribution ability starts to phase out. [The IRS: picking on rich people since 1913].
Is your head spinning yet? There are a million other rules, so be sure and check out this handy IRS Guide on IRAs. Also, Broke Grad Student recently answered a reader’s question about Roth IRA limits. Lastly, My Dollar Plan shared some excellent Roth IRA Q&A.
Tax Diversification
One of the great benefits of contributing to a Roth IRA are the tax benefits. You contribute after-tax dollars to a Roth IRA, but you avoid paying any tax on the earnings of the account. And when you withdraw your Roth IRA funds in retirement you don’t have to pay any taxes. So, in effect, it works just the opposite of a traditional IRA and/or your 401k/403b.
I’m not going to get into the debate of which is better (after-tax accounts vs tax-deferred accounts), but I’ll tell you that my goal is to have both, thereby diversifying my tax situation. I have no idea what my tax rate will be in retirement, but I do know that I’ll have some money taxed now, and some taxed later. This provides some comfort knowing that my entire retirement portfolio won’t be decimated by taxes up front or when I retire.
For more reading, check out Milk Your Money’s guide to Converting your Traditional IRA to a Roth IRA.
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I plan to open up a Roth IRA over the next few weeks. I hope to share that process with you and encourage you to do the same. Have any of you maxed out your Roth IRA contributions yet? Do you plan on contributing by the deadline in 2009?
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Congrats on maxing out your 401k! That is a great accomplishment. Between that on the Roth IRA, you are on the road to financial independence. Better contribute as much to the Roth now, before income restrictions prevent you from further contributions.
One ofmy goals within the next few years is to max out the 401k for 1 full year. One of these years…. not 2009 though… congrats to you… Keep making serious moves.
Heads up PT,
You can fund your 2008 contributions into 2009 but that account must exist prior to 2009. So if you are looking to use some of your 2008 funding ability go open it with a 100 bucks TODAY.
@My Journey – I haven’t heard that one. I can’t find this rule anywhere either? Please let me know where you found this “by 12/31″ rule.
@PT
My Journey is right. The account has to be established before year-end so that you can contribute for the 2008 tax year.
For example, you cannot open an IRA on January 1, 2009 and then make a contribution for 2008. Keep in mind that this is only for folks that haven’t opened an IRA yet. If you already have one, no need to sweat.
I just did this for a lady yesterday. We’ve opened the IRA this year (in my firm’s case and some others, no money is required-check to make sure) and will decide closer to April 15th of next year how much we will contribute.
Don’t put off till next year opening the Roth if you haven’t yet. You got till next Wednesday
Thanks for stepping in here, Jeff. But where in IRS Pub 590 is this stated? It’s not that I don’t believe you, I just couldn’t find it in the tax reg. Have a Merry Christmas.
@PT
Honestly, it’s just a rule that’s kind of always been passed down to me since I got it in the business. I’ve never actually tried to find it in the IRS regs.
First thing Friday, I’ll contact my IRA department to clarify and see if I can get an exact answer. Keep you posted….
Jeff,
Thanks for getting my back! LOL JK. PT, if Jeff can’t find it I will call my advanced planning dept on Monday.
It has to do with the theory that the IRS is allowing you to contribute to your 2008 IRA into 2009 but if you don’t have a 2008 IRA you can’t contribute into it in the year 2009 until April.
@PT and @My Journey
My Journey, I think we may have been mistaken. I contacted my IRA department and in regards to traditional and Roth IRA’s, you have until the tax deadline of April 15th to get it open. Woops!
I think what we may have been thinking of is business retirement plans. SEP IRA’s have to be established before the year end. Simple IRA’s have until the end of October.
Hope this clarifies. Sorry for the misinformation.
Hello there,
My husband and I (both around age 30) know we must open IRAs immediately, but neither one of us knows the first thing about it. I know that we are eligible for Roth and can only open with a small amount now. Also, we know that we want an account that is very low maintenance. I’ve been reading a lot about opening these accounts online – i.e. through T.Rowe Price or Vanguard. Is this wise for people like us? Or are we better off getting some actual advice with an actual person? Thanks!
@Totally Lost – You have until April 15th, 2009 or your tax filing day to open and fund the 2008 Roth IRA. So, just know that you have plenty of time.
I would recommend finding a non-commission, fee-only financial planner or CPA to advise you on (1) where to open the account and (2) what to invest in. At the same time, you need to make an effort to get the basic understanding of retirement accounts. There is a ton of free, quality information out there on the Roth IRA. Do some research yourself and get comfortable with the terminology so that you don’t have to blindly trust someone else. Best of luck.
PT & Jeff,
I also checked with my advanced business and estate planning dept. It seems that a traditional IRA can be set up post new year to take advantage of 2008 contributions.
That being said it should still be noted that if you are going to set up a different type of qualified account (SEP, SIMPLE, etc.) it may have to be set up in the next 2 days.
Thanks for the round up. Great advice.