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As end of year nears, think of retirement

By Ken Kretzer

POSTED: 01:30 a.m. HST, Dec 28, 2008

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As the year end approaches, thought ought to be given to retirement planning.

For most employed or self-employed individuals, there are two main types of retirement plans available.

First, if provided by your employer, are 401(k) plans. Second are Individual Retirement Accounts (IRA), both Traditional IRA's and Roth IRA's.

401(k) Plans

These plans allow an employee to elect to defer some portion of their income for retirement. Since the contributions to the plan and the plan's earnings are not taxable, the distributions received from the plan will be taxed.

A participant can contribute up to $15,500 for 2008. Individuals who turn 50 before the close of the tax year may make additional "catch-up" contribution of $5,500 for 2008, if the plan permits.

These plans often provide for an employer matching contribution. These contributions do not reduce the employee contribution limits.

Traditional IRA's

Employees and self-employed individuals who are not active participants in an employer-maintained retirement plan can contribute and deduct up to $5,000 for 2008 to an IRA. The catch-up contributions for IRA's are limited to $1,000 for 2008. Contributions cannot be made if the individual is over 70.

Contributions are deductible and must be made by due date of the return, i.e. April 15. Extensions are not counted. Like 401(k) plans, distributions from these traditional IRA's are fully taxable when received.

Individuals who are active participants in an employer plan, including 401(k)'s, cannot make deductible IRA contributions unless their adjusted gross income is below specified levels.

For 2008, for joint filers, the deduction phase-out begins at modified adjusted gross income (AGI) of $85,000 and is fully phased-out at modified AGI of $105,000. For single filers or heads of households, various other phase-out amounts apply.

For a non-active participant whose spouse is an active participant, the deduction phase-out begins at modified AGI of $159,000 and is fully phased-out at modified AGI of $169,000.

Married taxpayers can each make deductible contributions to separate IRAs, subject to the deduction phase-out rules that apply if either or both are active participants in an employer retirement plan for any part of the tax year.

Roth IRA's

Taxpayers can make nondeductible contributions to Roth IRAs. Distributions from Roth IRAs are generally tax-free. Traditional IRAs can be rolled over penalty-free (but not tax-free) into Roth IRAs under certain circumstances.

Individuals can make annual nondeductible contributions to a Roth IRA in amounts up to $5,000 for 2008, plus an additional $1,000 for those 50 and older, or 100 percent of compensation, if less, reduced by the amount of contributions for the tax year made to all other IRAs

Roth IRA contributions, like those made to traditional IRA's, must be made by due date of the return for the contribution year. Again, extensions are not counted. Unlike traditional IRAs, contributions are permitted after age 70.

Generally, by making contributions earlier in the year, you can benefit from having your money working for a longer period of time. By making IRA contributions for 2008 and 2009 between now and April 15, you could get a lot of money working towards your retirement.

Ken Kretzer is a senior tax manager in the Honolulu office of Grant Thornton LLP. He can be reached at Ken.Kretzer@gt.com..

As the year end approaches, thought ought to be given to retirement planning.


For most employed or self-employed individuals, there are two main types of retirement plans available.

First, if provided by your employer, are 401(k) plans. Second are Individual Retirement Accounts (IRA), both Traditional IRA's and Roth IRA's.

401(k) Plans

These plans allow an employee to elect to defer some portion of their income for retirement. Since the contributions to the plan and the plan's earnings are not taxable, the distributions received from the plan will be taxed.

A participant can contribute up to $15,500 for 2008. Individuals who turn 50 before the close of the tax year may make additional "catch-up" contribution of $5,500 for 2008, if the plan permits.

These plans often provide for an employer matching contribution. These contributions do not reduce the employee contribution limits.

Traditional IRA's

Employees and self-employed individuals who are not active participants in an employer-maintained retirement plan can contribute and deduct up to $5,000 for 2008 to an IRA. The catch-up contributions for IRA's are limited to $1,000 for 2008. Contributions cannot be made if the individual is over 70.

Contributions are deductible and must be made by due date of the return, i.e. April 15. Extensions are not counted. Like 401(k) plans, distributions from these traditional IRA's are fully taxable when received.

Individuals who are active participants in an employer plan, including 401(k)'s, cannot make deductible IRA contributions unless their adjusted gross income is below specified levels.

For 2008, for joint filers, the deduction phase-out begins at modified adjusted gross income (AGI) of $85,000 and is fully phased-out at modified AGI of $105,000. For single filers or heads of households, various other phase-out amounts apply.

For a non-active participant whose spouse is an active participant, the deduction phase-out begins at modified AGI of $159,000 and is fully phased-out at modified AGI of $169,000.

Married taxpayers can each make deductible contributions to separate IRAs, subject to the deduction phase-out rules that apply if either or both are active participants in an employer retirement plan for any part of the tax year.

Roth IRA's

Taxpayers can make nondeductible contributions to Roth IRAs. Distributions from Roth IRAs are generally tax-free. Traditional IRAs can be rolled over penalty-free (but not tax-free) into Roth IRAs under certain circumstances.

Individuals can make annual nondeductible contributions to a Roth IRA in amounts up to $5,000 for 2008, plus an additional $1,000 for those 50 and older, or 100 percent of compensation, if less, reduced by the amount of contributions for the tax year made to all other IRAs

Roth IRA contributions, like those made to traditional IRA's, must be made by due date of the return for the contribution year. Again, extensions are not counted. Unlike traditional IRAs, contributions are permitted after age 70.

Generally, by making contributions earlier in the year, you can benefit from having your money working for a longer period of time. By making IRA contributions for 2008 and 2009 between now and April 15, you could get a lot of money working towards your retirement.

Ken Kretzer is a senior tax manager in the Honolulu office of Grant Thornton LLP. He can be reached at Ken.Kretzer@gt.com..

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