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Retirement Savings: Catching up is not hard to do

by Brett Backues on December 6, 2011
Lawmakers in Washington D.C. apparently do not believe that can take care of ourselves without them forcing us to put away a few dollars from each paycheck for retirement. So, they have given us a long list of incentives to coerce us into doing what our mothers asked us to do with our very first paycheck. Save.
Each time Congress tries to simplify the tax code, we are given new terms like 807 (q), maximized contributions andminimum distributions to describe what we all know in simple terms as saving money.
Congress has taken pity on procrastinators by extending “catch-up” contributions for taxpayers 50 years old or older who have fallen behind with their long-term plan for retirement.
Don’t blink. But for the moment, here is the current list of qualified retirement savings plans:
Traditional IRAs:  Originally designed for individuals who are not active participants in an employer-sponsored pension plan.  The annual deductible contribution limit for an IRA this year is $5,000.  The catch up for 2011 is a $1,000 contribution for taxpayers 50 or older by the close of the taxable year, raising the limit for those late bloomers to $6,000. 
Individuals who are active participants in an employer pension plan may also make deductible contributions to an IRA, but their contributions are limited in amount depending on their Adjusted Gross Income (AGI).  For 2011, 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 household) and between $90,000 and $110,000 of modified AGI for married filing jointly.  There is no deduction allowed beyond these limits.
As an extra bonus this year, an individual will not be considered an “active participant” in an employer plan simply because the individual's spouse happens to be an active participant in their own plan for any part of the year.  That means the partner taxpayer may be able to take the full deduction for an IRA contribution regardless of whether their spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $169,000 to $179,000 for 2011.  Once again, there are no deductions allowed above these amounts.
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 2011 plus the 50-plus catch-up contribution, or the total compensation of both spouses reduced by the other spouse's IRA contributions
Got that? Contact me for specifics.
Roth IRA:  This newer 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 59½.  Distributions may be made earlier in the event of disability or death.  The maximum contribution is phased out in 2011 for persons with an AGI above certain amounts: $169,000 to $179,000 for married filing jointly; $107,000 to $122,000 for single taxpayers (including heads of household); and up to $10,000 for married couples filing separately who lived with the spouse during the year.
Roth IRA Conversion Rule:  Funds from a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan may be rolled over into a Roth IRA.  But be aware that the rollover amount is treated as a taxable event and you will pay tax on the amount converted.  No penalties will be applied if all the requirements for such a transfer are satisfied.
In past years, a taxpayer's AGI (whether married filing jointly or single) was limited tojust $100,000 to make such a conversion and the taxpayer was restricted from filing as a married individual.  For 2011, the AGI limitation will not apply to conversions from a Roth designated account in a §401 or §403(b) plan.  Also new this year, the $100,000 income limit on Roth IRA conversions will not apply, so taxpayers will be able to make Roth IRA conversions without regard to their AGI.  If you convert to a Roth IRA in 2011, the tax on the converted amount will have to be paid in the year of conversion. 
Keep in mind that, if you already made a conversion earlier this year, you still have the option of undoing the conversion.  This is a useful strategy if the investments have gone down in value so that if you were to do the conversion now, your taxes would be lower.  This is a complicated calculation and we should probably meet to determine your best options.
In addition, this year if your §401(k) plan, §403(b) plan, or governmental §457(b) plan has a qualified designated Roth contribution program, the distribution to an employee (or a surviving spouse) from such account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual.
401(k) Contribution:  The §401(k) elective deferral limit has been increased to $16,500 for 2011. Even better, if your  §401(k) plan has been amended to allow for catch-up contributions of $5,500 for 2011 and you will be 50 years old by December 31, 2011, that raises the total possible contribution to a total maximum of $22,000.
SIMPLE Plan Contribution:  The SIMPLE plan deferral limit for this tax year is $11,500. Once again, if your qualified SIMPLE plan has been amended to allow for catch-up contributions for 2011 you may contribute an additional $2,500. That’s a total of $14,000 toward retirement.
Catch-Up Contributions for Other Plans:  If you will be 50 years old by December 31, 2011, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.
Saver's Credit:  This nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual.  For 2011, only taxpayers filing joint returns with AGI of $56,500 or less, head of household returns with AGI of $42,375 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $28,250 or less, are eligible for the credit.  The amount of the credit is equal to the applicable percentage (10% to 50%, based on filing status and AGI) of qualified retirement savings contributions up to $2,000.
Required Minimum Distributions:  For 2011, taxpayers must take their required minimum distribution from IRAs or defined contribution schedules that cover §401(k) plans, both §403(a) and (b) annuity plans, and §457(b) plans that are maintained by a governmental employer.
Maximize Retirement Savings:  In many cases, employers will require you to set your 2012 retirement contribution levels before January of 2012.  If you did not elect the maximum 401(k) contribution for 2011, you can increase your amount for the remainder of 2011 to lower your AGI in order to take advantage of some of the tax breaks described in other retirement accounts. 
Maximizing your contribution is generally a good tax-saving move unless there are extenuating circumstances.
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