New Tax Breaks in Planning for Retirement Income
by Candace Bahr and  Ginita Wall, CPA, CFP^®

Whether you are nearing retirement or decades away, an increasingly complex challenge lies ahead—planning for your income to last throughout your lifetime. The first wave of baby boomers has begun to turn 60, with millions more right behind. And surveys reveal that their number one concern is outliving their income.

There are good reasons for concern.  These three factors make planning for retirement income more difficult than ever before.

Social Security currently provides only 19% of retirement income for most households, and only 25% of families include a member covered by a traditional pension plan. That means income for retirement depends more and more on personal savings and investments.

Many people are in over their heads when it comes to choosing investments and determining proper asset allocation, and surveys show that investors are losing confidence in their ability to make good decisions.

Lifespan is increasing, and at the same time people are yearning to retire early. Boomers are likely to spend 30 to 40 years in retirement, almost as long as they spent working.

Fortunately, there are reasons to be optimistic. Recent IRS regulations enhance the effectiveness of IRAs, 403(b)s, 401(k)s, and other defined contribution plans in building personal assets—increased contribution limits, greater rollover flexibility, and more advantageous distribution options.  For example, in 2007 you can contribute $15,500 to your 401(k), and if you are at least 50 you can stash an additional $5,000, for a total of $20,500. If you have an IRA, you can contribute $4,000, plus an extra $1,000 if you are age 50 or older. Or you can contribute that amount to a Roth IRA if your income is under $99,000 ($156,000 on a joint return).

Until this year, inheriting a retirement plan from someone other than your spouse could lead to an unpleasant tax hit. But now, under new legislation, any beneficiary of a qualified retirement plan can transfer it directly into an IRA in their name, thus deferring the taxes and stretching the withdrawals over a number of years, easing the tax bite. If you find yourself in this situation, consult someone who is familiar with these rules, so you don’t inadvertently trigger the taxes by taking payments prematurely.

Also beginning this year employers have the option to automatically enroll workers in 401(k) plans, increase employee contributions, and invest the money in the stock market. Employers are also encouraged to provide employees with investment advice, so they can gain confidence in their ability to plan for their own futures.