Plan Limits Up, But Not IRAs

After a year in which many thought the cost of living increased noticeably – and because of which the Social Security Administration announced a 5.8% cost-of-living adjustment in basic benefits beginning in January 2009 – the new retirement ceilings allowed by the Internal Revenue Service (IRS) disappointed individuals even as they cheered those covered by 401(k) and other qualified retirement savings plans.

IRA Limits Unchanged

It took a second notice from the IRS (Notice 2008-102) to make it clear that the 2008 traditional and Roth IRA limits – $5,000 (plus an additional $1,000 catch-up contribution if you are aged 50 or over) – remain the same in 2009. Current legislation dictates that new limits are to be indexed to inflation in $500 increments, and analysts soon figured out that even a relatively high inflation figure was not enough to reach that level. The $1,000 catch-up provision is not indexed, so it will remain unchanged unless altered by statute.

Plan Ceilings Increased

If you’re saving for retirement through company-sponsored retirement plans, you'll be able to contribute more in 2009, however.

The new maximums for pre-tax contributions to 401(k) and 403(b) plans jumped $1,000 to $16,500 for 2009. The catch-up limit for those 50 or over also increased, from $5,000 to $5,500. A 401(k) plan participant 50 or over in 2009 will be able to contribute a total of $22,000.

The limit of a SIMPLE IRA contribution for 2009 is raised to $11,500 from $10,500 in 2009. The SIMPLE catch-up limit for 2009 is $2,500.

The 2009 retirement plan limits

IRA – Traditional or Roth....$5,000
Catch-Up for Those 50 or Older....$1,000

401(k), 403(b)
Elective Deferral Limit....$16,500
401(k), 403(b)
Catch-Up for Those 50 or Older....$5,500

Defined Contribution Plan
Annual Dollar Limit....$49,000
(Maximum that may be contributed)

Defined Benefit Plan
Annual Dollar Limit....$195,000
(Maximum payable to participant)

SIMPLE IRA
Employee Contribution Limit....$11,500
SIMPLE IRA
Catch-Up for Those 50 or Older....$2,500

Highly Compensated Employee
Compensation Limit....$110,000

Annual Compensation Limit....$245,000
(Maximum compensation to be taken into account to determine contributions and deductions)

SEP Minimum Annual
Compensation Limit....$550
(Minimum to participate in simplified employee pension (SEP) plan)

Economic Outlook: Immense Problems Require Big Solutions
By Dr. Scott J. Brown, Chief Economist

The U.S. economy faced a number of difficulties in 2008, and 2009 looks likely to be just as challenging.

The National Bureau of Economic Research’s Business Cycle Dating Committee has pegged December 2007 as the start of the recession. For the first eight months of 2008, the recession seemed relatively mild. Indeed, gross domestic product (GDP) rose in both the first and second quarters. However, economic weakness became more severe and broader-based in September, as credit markets seized up.

The Federal Reserve responded to the crisis by cutting short-term interest rates by 100 basis points (bps) by the end of 2007, another 225 bps in the spring and yet another 175 bps by mid-December. With the target range for overnight lending between 0.25% and zero, monetary policy moves are limited. However, monetary policy can support the economy in other ways.

The Fed will turn to quantitative easing - a focus on the quantity of credit in the system, rather than on the price of credit (the interest rate). In late November, the Fed signaled that it would buy up to $100 billion in agency debt (Fannie Mae and Freddie Mac paper), up to $500 billion in mortgage-backed securities, and up to $200 billion in asset-backed securities (student loans, auto loans, credit cards loans and small business loans).

Predecessor Recessions

In the Great Depression, policymakers made all the wrong moves – raising taxes, hiking interest rates, putting up trade barriers and standing by while thousands of banks failed. This is not the Great Depression, but the downturn could rival the 1973-75 and 1981-82 recessions in both depth and duration.

The Treasury has moved to recapitalize the banking industry. Congressional leaders, working closely with President-elect Barack Obama, should have a massive stimulus bill ready to sign when the new president takes office later this month. This package will likely include spending on public works, middle class tax cuts and aid for the states.

Financial Planning:
Paying Tuition Directly Avoids Gift-Tax Exclusion Limits

The gift-tax exclusion rose to $13,000 for 2009 (it had been $12,000), a modest increase that may be welcomed by those who give annual gifts to relatives or help out with others’ education or medical expenses.

It’s easy enough to set up a 529 college savings plan, open a Coverdell Education Savings Account or use a Uniform Transfers to Minors Act (UTMA) account to save for higher education. There is, however, an easier way, if you can afford it, and if you don’t have time to invest for the long term.

The recipient can be a relative or a friend, and you won’t run afoul of the gift-tax exclusion.

IRS Publication 950 makes it clear that if your gift qualifies for the educational or medical exclusion, it is not a taxable gift. To do this, you simply pay education (or medical) expenses directly and forget about the gift-tax exclusion, because the amount is unlimited.

The key is to send your payment directly to a “qualifying” institution. Whether it’s a private high school, a college or a hospital, you must send the money directly to the institution. As long as you do that, the IRS takes no interest.