Rethink Retirement Plans for Brand new 401(k) Laws

Last week, the Internal Money Service raised the annual contribution limits for IRAs, 401(k)s and similar retirement plans in 2012. That means now may be a good chance to build your holdings of cash to spend in retirement.

Maximum contributions to a 401(k) or similar program is $17,000 in 2012, up from $16,500 this year, while additional "catch-up" contributions for people over 50 will stay $5,500. Yearly contributions to traditional as well as Roth IRAs is limited to $6,000, the same as this year. Changes in contribution rates for retirement plans mean that many people should rethink their nest eggs.

Higher limits are good if you're an aggressive saver, but would definitely we really would like to use an IRA to 401(k) for money? Don't many investors emphasize stocks and bonds in tax-favored retirement accounts?

Yes, many investors use these accounts for tax breaks on investment gains, as well as there aren't many gains with cash savings. Additionally, there's generally a 10% penalty for taking revenue out of these retirement accounts before age 59.5, so they're not a good place for an emergency fund to routine bills.

While all that's true, money has other uses that can make it a sensible way for a portion of your long-term retirement savings. Money is definitely not subject to the big price drops that can hit stocks as well as bonds, and so it can help even out the bumps, making your portfolio's performance more stable.

It can also pay to have a money reserve for jumping on opportunities, like buying stocks whenever prices are down. Money is a good choice for brand new contributions when stocks as well as bonds look too risky, especially in accounts that provide immediate tax deductions on contributions.

As well as, naturally, as retirement nears it's good to have enough money to fund spending needs for a year to 2, and so we will not have to market stocks or perhaps bonds during a downturn. It can pay to build that gradually, to avoid having to liquidate large stock or perhaps bond holdings if costs are down when you retire.

Finally, interest earnings on cash in an IRA to 401(k) are sheltered from income tax. This isn't a big consideration right now because interest rates are thus low, but it could matter when yields return to regular. Because there are yearly limits on retirement program contributions, it can pay to build the tax-favored cash reserves over time.

Interest in a 401(k) or traditional IRA is taxed as income, the same rate you'd face in a taxable account. But in a taxable account the tax is due the year the interest is earned, whilst in those retirement accounts tax is postponed until the cash is withdrawn, which leaves more in the account to compound. There is no tax on interest earned in a Roth IRA or Roth 401(k), because all withdrawals are tax free.

The new contribution as well as income limits are certainly not exactly earth-shaking, but every little bit helps.
And, as the new year approaches, it is a good time to reassess savings plans. Many employers, for example, send notices in the fall reminding workers they can change their 401(k) contributions for the coming year. It's a convenient time to rethink the allocation to stocks, bonds as well as money.


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