The Up Side of a Down Market

02/18/2009 12:00 pm EST


David Fried

Editor, The Buyback Letter

David Fried, editor of The BuyBack Letter, says some limits have been loosened on retirement investing, giving investors an opportunity to buy low.

For the time being, many investors have been scared away from the stock market.

However, the amount that can be contributed has gone up. This provides an opportunity to “buy low”.

Due to cost-of-living adjustments, the Internal Revenue Service has raised the maximum contribution level to $16,500 to a 401(k) plan. Those who are 50 or older by the end of the year can add another $5,500. And the maximum amount that can be contributed into a defined contribution plan is $49,000, up from $46,000 in 2008. With the markets well off their highs of a few years ago, saving aggressively for retirement would be a good strategy now.

Contributions to a Roth IRA are made with after-tax money, meaning you don’t see any savings now, but the account grows tax free and the withdrawals—once you’re 59 ½ or older—are tax free as well.

Income requirements have also gone down, making it easier to qualify for a Roth IRA. Single filers are eligible to contribute up to $5,000 a year as long as they earn less than $105,000 this year (up from $102,000 in 2008), while married couples can contribute if their income is $166,000 or less.

Today’s tax rates are on the low side historically, [and] it is safe to assume that tax rates will be higher when you withdraw money from your IRA. Therefore, anything that you can pay taxes on now and have tax free later would seem prudent.

Before you dismiss Roth accounts because you are ineligible (you are in too high a tax bracket), starting in 2010, anyone can convert an IRA (or other traditional retirement account) to a Roth IRA. The catch is that you would need to pay taxes on the amount you are converting. However, if your income is down, you may be in a lower tax bracket than you have been or will be in. Also, the rules permit this tax to be paid off in two years instead of one.

Finally, the amount of money that can be given away tax free to the recipient has increased. This year, single people can gift up to $13,000 tax free to any individual, while married couples can gift up to $26,000.

[Finally,] the Worker, Retiree, and Employer Recovery Act of 2008 was signed into law in late December. This law suspended the minimum required distribution rules for IRA accounts and qualified retirement plans for the 2009 tax year. That means [most] seniors who are 70 ½ or older are not required to withdraw money from their retirement accounts this year.

[So,] not only will seniors avoid having to pay taxes on the withdrawal, but they can also keep their retirement account intact so it's better poised to recover when the market does.

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