Last Chance for 2010 Retirement Investment Planning

In Estate Planning by Sarah E. Martello

There are still a few weeks left to take advantage of tax-saving opportunities for 2010 retirement planning.  2010 is a great year to implement or    modify your retirement investments.  The expanded availability of Roth IRAs, coupled with preferential income recognition opportunities for rollovers and other changes making regular IRAs more attractive, provide a savings incentive for retirement planning.   Below is a brief discussion of various retirement investment vehicles, including recent changes for the 2010 tax year.

Traditional IRAs

Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2010 is $5,000. For 2010, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals. For 2010, the AGI phase-out range for deductibility of IRA contributions is between $56,000 and $66,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

Spousal IRA

If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,000 for 2010 plus age 50 catch-up contributions, or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).

Roth IRA

This type of IRA permits nondeductible contributions of up to $5,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 591/2. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2010 for persons with an AGI above certain amounts–$167,000 to $177,000 for married filing jointly.

Roth IRA Conversion Rule

If you have funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan, it may be advantageous to consider rolling a portion of such into a Roth IRA this year.  A rollover is treated as a taxable distribution, hence, you will pay tax on the amount converted.  However, depending on your current age and projected AGI for 2010, a Roth conversion may provide you significant tax savings.

Beginning in 2010, taxpayers are able to make Roth IRA conversions without regard to their AGI. If you convert to a Roth IRA in 2010, you have the option of spreading the income ratably over two taxable years (2011 and 2012). This opportunity is available only for conversions in 2010. For conversions in 2011, the tax will have to be paid in the year of conversion.

401(k) Contribution

The §401(k) elective deferral limit is $16,500 for 2010. If your §401(k) plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).

SIMPLE Plan Contribution

The SIMPLE plan deferral limit is $11,500 for 2010. If your SIMPLE plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $2,500.

Catch-Up Contributions for Other Plans

If you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.

Maximize Retirement Savings

In many cases, you are required to set your 2011 retirement contribution levels before January 2011. You may want to increase your contribution to lower your AGI in order to take advantage of some of the tax breaks described above or to avoid future tax rate increases. Maximizing your contribution is generally a good investment move and can provide an array of tax saving opportunities.

Need Help?

If you have further questions or concerns as you make plans to maximize your retirement investment, give our office a call.  We are currently offering complimentary phone consultations for issues concerning retirement investments.