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Wiles: Retirement plan changes may spur saving

The White House economic stimulus plan was heavy on spending inducements but light on retirement incentives. Still, a few other carrots are dangling out there to encourage saving, especially in retirement plans, with more benefits on the way in 2010.

Whether you’re nearing retirement or remain years away, regularly socking away cash is the best way to be prepared. Here’s what’s happening with three key types of accounts – traditional individual retirement accounts, Roth IRAs and workplace 401(k)-style plans.

Traditional IRAs

IRAs let people invest on a tax-deferred basis, with taxes due when the money is withdrawn. Some investors can deduct their contribution, up to $5,000 a year (more for workers 50 and up).

Deduction eligibility depends on whether you have retirement coverage at work. If so, you might not be able to deduct anything if your income is too high.

IRA deductions for those with workplace coverage in 2009 start phasing out at income levels of $55,000 (singles) and $89,000 (joint filers).

Changes ahead:

Most Americans don’t contribute to an IRA, and many low-income workers miss out on the saver’s tax credit, worth up to $1,000 for singles and $2,000 for joint filers with modest income.

The White House’s 2010 budget aims to boost participation by offering a 50 percent, refundable saver’s credit on the first $1,000 in retirement contributions for families earning under $65,000.

IRAs and 401(k) plans are key places to invest saver’s-credit money.

Roth IRAs

Unlike traditional IRAs, Roths offer no deductions. Still, investment dollars grow tax-free, and taxes don’t normally apply on withdrawals.

If you think income-tax rates will rise in the future, it’s smart to have some retirement money in Roths. Plus, you don’t have to start withdrawing from Roths by age 701/2, as with regular IRAs.

Higher-income people face Roth contribution limits. For 2009, eligibility starts to end at $105,000 in income for singles, $166,000 for joint filers.

Changes ahead:

You can convert or transfer money from a traditional IRA to a Roth (and pay ordinary income taxes) if your income doesn’t exceed $100,000. But starting in 2010, the government is waving that $100,000 limit, which means higher-income people can open Roth IRAs with a transfer.

With most investments down in value, a conversion makes more sense now because the tax bite would be less. Plus, you can delay taxes on a conversion done in 2010 to 2011 and 2012.

401(k) plans

In terms of taxation, 401(k) plans work like traditional IRAs, with a front-end tax deduction (through salary deferral), tax-deferred growth of investment dollars and taxes payable on withdrawals. (Roth 401(k)s also are available but are fairly minor so far.) One key incentive making 401(k)s popular is the matching funds paid by employers.

You can invest more each year in a 401(k) than in an IRA, with money pulled conveniently from each paycheck.

Changes ahead:

Workers can invest up to $16,500 in 401(k) plans in 2009, $1,000 more than in 2008.

Despite their benefits, 401(k) plans have proved less popular among younger and lower-paid workers. To address this, the White House budget aims to boost participation by prodding 401(k) sponsors to enroll all eligible workers automatically.

Employers lacking a retirement plan would enroll workers in a direct-deposit IRA instead.

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