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As a tax professional with experience in the vending and refreshment services industry, I believe that changes in retirement contributions are the most important aspects of the new tax law that took effect beginning in 2006 and for changes taking effect in the next few years.
Individuals have until April 15 of 2007 to change their contributions for 2006.
Assuring financial security in retirement has long been the responsibility of the individual. What many do not realize is that this responsibility will become greater as individuals are expected to provide more of their retirement funds.
In addition, it is unlikely that people will be able to retire solely on their Social Security payments. For individuals who are less than 45 years of age, it is even more important not to depend on Social Security. In the not-too-distant future, more people will be taking money out of Social Security and fewer people will be paying into it. The politicians have a big job ahead of them in fixing this problem, and in the meantime, individuals should not depend on the politicians.
Although federal programs such as Social Security and Medicare will be around in the future, they will need to be restructured in order to keep them solvent. The restructuring will most likely come in two primary ways.
The first change will occur when a person reaches the government's predetermined retirement age. The age limit has steadily increased over the past several decades. The second change reduces the benefits that individuals receive. The restructuring will mean the individual will assume more financial obligation for a longer period of their life.
Additionally, the safety net of pensions, which many in the country have enjoyed in the past, is being reduced or eliminated by employers.
| Maximum Deduction Calculation | |
| Single taxpayer Adjusted Gross Income (AGI) is $58,000 in 2006. | |
| What is maximum IRA deduction for 2006? | |
| AGI | $58,000 |
| Less | -$50,000 |
| Excess over $50,000 | $8,000 |
| Divided by $10,000 (Phase-out range) | $10,000 |
| Phase out percentage | 80% |
| Times maximum IRA deduction | $4,000 |
| Amount of IRA phased out | $3,200 |
| 2006 maximum deduction | $800 |
Given this information, strategies need to be employed to ensure that a person's standard of living may be maintained into their retirement years. The federal government has recognized this and provides opportunities to prepare for the future.
One vehicle that is available is the Individual Retirement Account (IRA).
Traditional IRAs are funded by pre-tax earnings while Roth IRAs are funded by "post tax" earnings that can be withdrawn tax-free. Many financial professionals believe it is important today for individuals to have both types of funds, pre- and post-tax.
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