Tax Law Changes Boost Savings
Yes, I hate to break it to you but it is that time of year again. The time has come for many of us to get out our checkbooks and to write Uncle Sam a big fat one. Fortunately, this year you will be able to lighten the load you pay by socking away a little more in retirement savings.
A key tax law change took effect this year that allows investors to squirrel away more money in their 401(k) and retirement accounts.
The limits that can be contributed to 401(k) accounts are rising this year, but you probably haven’t heard much in the mainstream press about it. I did read one good article in The Wall Street Journal that highlighted the tax law revisions. Short of that limited coverage, not much mention has occurred elsewhere. But hey, one of the reasons you subscribe to the Alert is for me to share with you the latest news on how best to manage your money and that’s just what you’ll always get.
Under the new law, the maximum amount that most of us can contribute to a 401(k) account will rise to $15,500 during 2007, compared to $15,000 last year. The exception is for people age 50 and older, who will be able to sock away an additional $5,000 by year-end. However, the savings limits for individual retirement accounts (IRAs) will stay at $4,000 for those under age 50 and $5,000 for those 50 and older.
There’s also good news for those of you on the border of qualifying for a Roth IRA these past few years. The income limits for making contributions to a Roth are now higher. For couples filing their federal return jointly, the amount you can contribute phases out if your income is between $156,000 and $166,000. That’s up from $150,000 to $160,000 in 2006. For singles, this year the range now is $99,000 to $114,000, up from $95,000 to $110,000 last year.
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Also new for 2007 is a tax law change that will help people who inherit money from an employer-sponsored retirement plan through any non-spouse. This change now allows a child, for example, to inherit 401(k) money directly from a parent’s qualified retirement plan and to transfer those funds directly into an IRA. The inheritance then could be spread out over many years to avoid a big, one-time tax hit.
Another benefit to those inheriting money from people who die in 2007 is that estate taxes fall to 45%, down from 46%. The 1% difference may not seem huge but the amount can really add up when large estates are involved.
However, current law calls for the federal estate-tax exclusion to remain at $2 million in 2007 and 2008, before rising to $3.5 million in 2009. But the existing law has the exclusion disappearing entirely in 2010, before the limit becomes $1 million in 2011. Do not be surprised if the erratic levels of the federal estate-tax exclusions are modified by lawmakers before the end of the decade.
An interesting new tax break for 2007 applies to anyone who buys and pays for mortgage insurance this year. That new deduction phases out if your gross adjusted income hits $100,000. The exception is that the limit is just $50,000 for married people who file separately. I am sorry to say that anyone who bought mortgage insurance before this year is not eligible for the tax break.
One tax law change that can take money out of your pockets this year is an increase in Social Security taxes. Amid growing concerns that Social Security will not be able to fund its obligations, we should not be surprised that lawmakers are looking to us for additional revenue. Specifically, the maximum amount of earnings subject to Social Security tax jumps to $97,500 in 2007, compared to $94,200 last year. The heightened limit could cost certain taxpayers hundreds of additional dollars.
Overall, the tax law changes offer you more opportunities to save in 2007 than in 2006, so take the breaks that lawmakers are willing to give you. Beef up your 401(k) and IRA contributions to the maximum allowable amounts, if you can afford to do so. Any dollar saved from Uncle Sam’s grip now will mean more money for you in your retirement years. My advice is to use these tax law changes to your best advantage.
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Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
