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Many employers are dropping their contributions, but for many workers it's still best option
BY JOSEPH LISANTI
DAILY NEWS STAFF WRITER
Monday, January 19th 2009, 8:32 AM
With many prominent New York employers, including FedEx and Starbucks, rethinking their matching contributions to workers’ 401(k) accounts, does it still pay to participate?
Or would you better off redirecting retirement dollars into an individual retirement account?
The 401(k) — and the 403(b) for municipal employees — wins even without an employer match, according to V. Peter Traphagen Jr., a certified public accountant in Oradell, N.J.
Why?
Because “contribution limits are significantly greater,” he said.
For 2009, you can contribute up to $16,500 to a 401(k) or 403(b), or $22,000 if you’re 50 or older.
For an IRA, the limits for 2008 and 2009 are $5,000, plus an extra $1,000 for the 50-and-older group. (You can still contribute to an IRA for the 2008 tax year through April 15.)
There are some other advantages to the 401(k): At age 701/2, you are required to start taking distributions from a traditional IRA, but not from a 401(k) or 403(b) if you are still working. (This year, because of the economic crisis, mandatory distributions are waived for IRAs, 401(k)s and 403(b)s.)
Another plus with a 401(k) or 403(b): You can borrow up to 50% of your balance up to $50,000.
“You don’t have that option with an IRA,” Traphagen said.
Traditional IRAs usually have more investment choices, and you can withdraw up to $10,000 without penalty to buy a first home, although taxes will have to be paid.
But one of the biggest advantages of the 401(k) and 403(b) is that the money comes directly out of your paycheck before you can spend it.
IRA expert Ed Slott, a certified public accountant in Rockville Centre, L.I., takes a different tack. Slott’s advice is to put money first into a Roth IRA.
Although there are no tax deductions for contributions, earnings in a Roth account are completely tax free. With a 401(k), 403(b) or a traditional IRA, you’ll get a tax break now, but “for the rest of your life, you’ll be partners with the government,” Slott said.
To fully fund a Roth for 2009, your income must be below $105,000 if you’re single or $166,000 if you’re married and filing jointly. Contribution limits are the same as those for traditional IRAs.
Slott calculated that a 30-year-old saving $5,000 a year in a Roth for 35 years and getting an annual return of 8% would end up with $930,000 tax free.
Of course, you’d have to fund the account every year. “Don’t stop saving,” Slott said.
Many employers are dropping their contributions, but for many workers it's still best option
BY JOSEPH LISANTI
DAILY NEWS STAFF WRITER
Monday, January 19th 2009, 8:32 AM
With many prominent New York employers, including FedEx and Starbucks, rethinking their matching contributions to workers’ 401(k) accounts, does it still pay to participate?
Or would you better off redirecting retirement dollars into an individual retirement account?
The 401(k) — and the 403(b) for municipal employees — wins even without an employer match, according to V. Peter Traphagen Jr., a certified public accountant in Oradell, N.J.
Why?
Because “contribution limits are significantly greater,” he said.
For 2009, you can contribute up to $16,500 to a 401(k) or 403(b), or $22,000 if you’re 50 or older.
For an IRA, the limits for 2008 and 2009 are $5,000, plus an extra $1,000 for the 50-and-older group. (You can still contribute to an IRA for the 2008 tax year through April 15.)
There are some other advantages to the 401(k): At age 701/2, you are required to start taking distributions from a traditional IRA, but not from a 401(k) or 403(b) if you are still working. (This year, because of the economic crisis, mandatory distributions are waived for IRAs, 401(k)s and 403(b)s.)
Another plus with a 401(k) or 403(b): You can borrow up to 50% of your balance up to $50,000.
“You don’t have that option with an IRA,” Traphagen said.
Traditional IRAs usually have more investment choices, and you can withdraw up to $10,000 without penalty to buy a first home, although taxes will have to be paid.
But one of the biggest advantages of the 401(k) and 403(b) is that the money comes directly out of your paycheck before you can spend it.
IRA expert Ed Slott, a certified public accountant in Rockville Centre, L.I., takes a different tack. Slott’s advice is to put money first into a Roth IRA.
Although there are no tax deductions for contributions, earnings in a Roth account are completely tax free. With a 401(k), 403(b) or a traditional IRA, you’ll get a tax break now, but “for the rest of your life, you’ll be partners with the government,” Slott said.
To fully fund a Roth for 2009, your income must be below $105,000 if you’re single or $166,000 if you’re married and filing jointly. Contribution limits are the same as those for traditional IRAs.
Slott calculated that a 30-year-old saving $5,000 a year in a Roth for 35 years and getting an annual return of 8% would end up with $930,000 tax free.
Of course, you’d have to fund the account every year. “Don’t stop saving,” Slott said.
Many employers are dropping their contributions, but for many workers it's still best option