Some Straightforward Planning Can Help You Build a Better Future for You and Your Family

Some Straightforward Planning Can Help You Build a Better Future for You and Your Family This year, tax laws take effect that impact investors in a variety of ways. There's plenty of good news: Investors can save more for retirement, make larger gifts and leave more to heirs.

Here's a look at some new provisions and how you can take advantage of them to build a better financial plan for you and your family.

Save more for retirement
Contribution rates increase this year for participants in 401(k), 403(b) and 457 plans. The maximum elective amount employees can contribute before taxes now stands at $15,000, up from $14,000 last year. What's more, workers age 50 or older this year get to make an additional 'catch-up' contribution of up to $5,000 ($1,000 more than they could in 2005), enabling them to sock away up to a total of $20,000 toward retirement.

'That extra catch-up contribution is extremely helpful to many baby boomers who are finding themselves behind in their retirement savings due to college tuition and other big expenses,' says Colleen O'Donnell, a Certified Financial Planner PractionerTM with Lincoln Financial Advisors in Dallas, Texas.

Advice: Maximize elective contributions to your retirement plan'the benefits are too good to pass up. 'The money you contribute is pretax, your employer may make a matching contribution, and since the money is taken directly from your paycheck, you'll probably never miss it,' says O'Donnell.

Invest in a new type of retirement plan
The Roth 401(k) was officially launched on January 1 of this year and is open to any worker who qualifies for a regular 401(k)& making it accessible to highly paid employees who are ineligible for a Roth IRA. Like the Roth IRA, this new plan only allows you to make after-tax contributions. However, money in the account has the potential to grow tax-deferred and after you've been in the plan for at least five years and are over age 59 1/2 any earnings can be withdrawn without paying any taxes. A regular 401(k), by contrast, is funded with pretax contributions that accumulate on a tax-deferred basis but are taxed when withdrawn. Employer matching contributions to a Roth 401(k) are made into the regular 401(k) account.

The Roth 401(k) will certainly offer employees greater choice in how they wish to make retirement contributions. However, O'Donnell cautions workers that the tax laws governing this type of plan could change over time and affect its benefits if, for example, withdrawals become partially taxable. In addition, it's still unclear how many employers will choose to offer the plan.

An Idea: If your employer offers a Roth 401(k), consider splitting your contributions between the Roth 401(k) and a regular 401(k) to diversify your tax exposure. Or, you might stick with the more established regular 401(k). 'You'll pay taxes when you take withdrawals, but most retirees are in lower tax brackets by the time they retire,' points out O'Donnell.

Make bigger gifts
Investors with money to give away will be happy to hear the gift tax exclusion limit has been bumped from $11,000 to $12,000. This means you can make gifts of up to $12,000 to as many people as you like without having to report it to the IRS. Best of all, the money you gift is removed from your estate, potentially lowering your estate tax bill. In addition, parents or grandparents who want to contribute to a child's 529 plan now can combine five year's worth of gifts and give $60,000 in one lump sum & helping to speed up the growth of junior's college fund.

Advice: Look for ways to maximize your giving this year, including consulting with your financial planner about creating a legacy through an insurance trust that can help leverage your gifts.

Pass along more of your estate
This year you can leave $2 million to your heirs free of estate tax, up from $1.5 million in 2005. This provision makes it a good time to review your estate plan, wills and trusts and make any adjustments that can maximize the transfer of assets. If you're an affluent couple, for example, you should look to equalize your estate so that you and your spouse each own up to $2 million in your names.

Although these current provisions only recently took effect, you'll want to start making them work for you right away. The reason: Many of these provisions are set to expire in 2010 unless the government extends them.

In short, there's no time to waste. 'Meet with your financial planner now to discuss how the current provisions in the tax laws affect you,' says O'Donnell. 'Use the benefits while you can.'

Talk to Your Financial Planner About:
  • Your current retirement portfolio and the potential benefits of increasing your retirement plan contributions.
  • The pros and cons of contributing to a Roth 401(k), based on your goals and needs.
  • Creating or updating your estate plan to reflect changes allowing you to pass along more to heirs.