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Now that we’re nearing the end of the year, there are a number of financial choices to consider while there’s still time. Many yearly contributions end on Jan 1st (or on April 14th, tax day) and since we only have a couple of months left, now’s the time to re-evaluate standings and strategy.
Roth IRA/Traditional IRA/SEP IRA - The IRA triplets should be the first retirement plan ‘maxxed-out’ for the typical investor. The Traditional IRA, with a maximum contribution of $4000/person this year ($5000 if over age 50) will also contribute to a reduced tax burden.
The Roth IRA doesn’t have a tax advantage immediately, but grows tax-free for the remainder of the time it’s invested, and is disbursed tax-free.
SEP IRAs, for those self-employed people, are almost identical to Traditional IRAs, with a few more contribution limit rules, but with a maximum contribution of $45,000 for 2007! If possible, now is the time to make sure you make the maximum contributions for these type of retirement funds by April 14th, 2008.
401(k)/Roth 401(k)/403(b) - The next retirement accounts to consider are the ones offered by your employer. Most employers offer some kind of retirement vehicle where the employee contributes to it. Additionally a large percentage of employers match a certain percentage of employee contributions. Take advantage of this free money!. Even if you can’t max out the contributions to these funds, CONTRIBUTE ENOUGH TO GET THE COMPANY’S MATCHING FUNDS! This is just free money! Gratis! Giving it away!. If you can max out the rest, up to the maximum ($15500 + $5000 catch-up for those over 50)
HSA Accounts - For those with Health Savings Accounts, there is still time to contribute up to the maximum $5420/year to this tax-free account. The money is contributed pre-tax, and can be withdrawn tax-free for medical expenses. Additionally, if unused, it continues to build, identical to the Roth IRA. Take advantage! It’s a pretty sure bet that medical expenses will get HIGHER in the future, no matter what.
Education Savings Account/529 Plans - ESA and 529 plans are next to be maxed out. ESA’s have contribution limits of BOTH $2000 per covered individual (from any source) and $2000 total contributions to ANY ESA from a single individual.
i.e. Johnny’s Dad wants to contribute to Johnny and Jenny’s ESA accounts. He can contribute UP TO $2000 between Johnny and Jenny, in any combination. He decides to contribute $1000 to each, maxing out his contributions.
Now, Johnny’s Mom decides she wants to do the same thing. She also contributes up to her max of $2000, $1000 to each child.
Finally, they hear from Grandma that she also wants to contribute to the grandkids ESA. However, since both Johnny and Jenny have had $2000 contributed to them ($1000 each from Mom and Dad) Grandma can’t contribute for this year. She could contribute after Jan 1st, for 2008, but that wouldn’t do her any good for 2007. And just to make things even more fun,..
From the IRS homepage (www.irs.gov) ,.. contribution limit may be reduced if your modified adjusted gross income (MAGI) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced. If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone’s Coverdell ESA.
529 Plans are state-specific, but generally have higher contribution limits. You can contribute up to $12,000 (depending on state limits) before federal gift-tax implications come into play. Consult your 529 plan and it’s specifics for more details.
Now, once you get through fully funding all of these accounts and plans, if there’s any money left over you’re more than welcome to send it to me.
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