Related: Roth IRA Conversion and Traditional vs. Roth IRA: An Introduction and Comparison
The total contribution limit for IRAs is not changing in 2009. Just like 2008, the maximum you can contribute to your IRAs across both Traditional and Roth types is $5,000. Anyone who becomes 50 years old this year has a higher maximum of $6,000. Keep in mind that this maximum is across IRA types, so if you’re 49 years old and have already invested $4,000 in a Roth IRA, you can only add $1,000, whether the amount is invested in a Traditional IRA, Roth IRA, or split between the two.
The phase-out ranges for Roth IRAs change this year. If your modified adjusted gross income (MAGI), a specific calculation on the 1040 tax form, is above $105,000 for single filers or above $166,000 for those who are married filing jointly, your maximum allowable Roth IRA contribution begins to reduce to zero. If your MAGI is above $120,000 (single) or $176,000 (married filing jointly), you do not qualify for Roth IRA contributions.
If you haven’t contributed to your 2008 IRA, don’t panic. You have until your tax filing deadline to fund your 2008 IRA. I haven’t contributed to my 2008 Roth IRA yet. I need to calculate my MAGI first in order to determine my maximum contribution amount.
Fidelity and Vanguard, monsters in the world of mutual funds, are busy creating new products catering to the vast number of baby-boomers approaching retirement. These products are designed to compete with annuities, insurance products with guaranteed income, but are investments products so they offer no guarantees. Like target retirement funds, the asset allocation of these funds of funds changes over time, but they are managed more actively.
Fidelity’s strategy is to create “Income Replacement Funds.” While target retirement funds are organized by the projected retirement date, the Income Replacement Funds are designed to liquidate in a particular year. There will be a fund for every other year between 2016 and 2042. Between the times of investment and liquidation, the fund will provide a monthly cash payment based on investment gains and possibly a portion of the principal.
On the other hand, Vanguard will be offering three different portfolios: Growth Focus, Distribution, and Growth and Distribution (a combination). The purpose of the Growth Focus portfolio is to maintain your principal while investing aggressively. The Distribution portfolio is designed to maximize your monthly payments while preserving the principal as much as possible. The Growth and Distribution portfolio falls somewhere in the middle of the other two.
In this way, with no end date, the Vanguard funds will operate more like a university endowment.
…[U]nlike annuities, these funds let you keep your money. After the $25,000 initial investment, you can buy additional shares or sell them without penalty, a big advantage if you need to pay for an unexpected expense.
The $25,000 investment sounds steep, but these funds are for retirees who may be changing their perspective at retirement. They will have the funds from their 401(k) and IRAs which will be tapped to help pay for expenses once retirement is in full swing.
I have not yet seen any information about projected fees to cover the operation and management of these funds.
Turning savings into income, Eugenia Levenson, Fortune Magazine, June 18, 2008.
I spent a few hours yesterday completing my tax return. Although I had wanted to work with a tax professional, my procrastination interfered with the plan. It wasn’t as complicated as I expected, but there may have been some deductions I missed. I owe a few thousand dollars, which was less than I originally anticipated but more than I wanted to the federal and state governments in total.
Once again, I chose TaxAct to calculate and electronically file my federal and state tax returns.
When I finally meet with a tax account this year, I will arrange for a review of the returns from the past few years.
SEP IRA contribution completed
While completing the tax return, I was able to determine how much I could contribute to a SEP-IRA for 2007, so I initiated transfers of $4,350 into Vanguard’s Total Stock Market Index Fund (VTSMX) and about $8,480 into Prime Money Market Fund (VMMXX) to represent the employer contributions.
I intend on creating an automatic periodic transfer from the money market into the stock index.
The initial contributions as well as the tax payments will be deducted directly from my ING Direct account this week.
Economic stimulus payment
According to the Economic stimulus payment calculator, if I entered my information correctly I can expect a $600 payment this summer.
It will be disappointing to see my net worth drop this month due to my tax payment. I’ve increased my estimated payments for 2008 to attempt prevent a large payment next April.
Here in the United States, it’s Thanksgiving. I hope all readers are able to spend time with their family or friends. I’m still in California visiting my relatives and enjoying a relaxing vacation. Well, it’s relaxing in some sense. I’ve actually been working hard at moving some of my major websites, like pfblogs.org and the MoneyBlogNetwork (and its forums) to new hardware.
I’m also managing to find time for blogging. Here is the next year-end tax saving move from CNN Money. The writers suggest timing your bonuses and investment gains in the year that will be most beneficial when looking at your taxes.
Generally speaking, if you’re in a high tax bracket it may reduce your tax bite if you postpone some income to next year. That’s because the income ranges that apply to each tax bracket go up with inflation annually, so more of your income will be taxed in 2008 at lower rates.
If you’re like me, then you don’t have a choice regarding the timing of your bonus. My 2007 bonus will be included in my paycheck around the first week of March 2008. As I understand it, most people receive their bonuses towards the end of the year.
The article also includes advice for taking large distributions from retirement plans. These distributions, if large enough, can move the recipient from one tax bracket up to another. If you can take part of a distribution in one year and postpone the other part, then you are diversifying your tax exposure, at least for one year.
CNN also mentions that it make more sense to take more income this year than next year, particularly if you think you’ll be in a low income bracket next year.
f you’re planning to sell some appreciated stocks or funds and you have a good chance of being in the 10 percent or 15 percent tax bracket next year if you take more income this year, you’ll enjoy a 0 percent capital gains and dividend rate in 2008.
7 Year-End Tax-Saving Moves [CNN Money]
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