No doubt about it, 2008 was a bad year for the stock and bond markets. Hopefully, the coming year may not be as bad but nobody I know is counting on a great 2009 either. Given the recession, dim prospects for investment and a general feeling that conserving capital might not be a bad idea, many investors are considering foregoing this year’s tax deferred contribution. Don’t do that.
My advice is to go ahead and contribute the maximum amount you can afford. For those over 50, that means you can contribute a tax- deductible $6,000 in 2008 to a traditional IRA ($5,000 if you are under 50) subject to phase out limitations on your income levels and marital status. The same applies to a Roth IRA although the tax deduction does not apply. As for your 401(K) s, this year’s allowable tax deferred contributions are $15,500 for those under 50 while a catch-up contribution of an additional $5,000 is allowed for those over 50.
So given the economic malaise we face, why do I say contribute? For one thing, the stock markets are down by a greater amount in one year then at any time since the Great Depression. Securities of all kinds are at historically cheap levels but they won’t stay that way forever. By investing new cash into your tax-deferred portfolios you can take advantage of these cheaper prices.
Remember too that your tax-deferred accounts are long –term in nature so, depending on your age, you stand to reap the benefits of buying in now and watching your investment not only recover but continue to grow for years into the future. If, on the other hand, you remain cautious concerning the prospects for the markets in 2009 you should still contribute only invest your new funds in something safe like money markets or Treasury bonds until you feel more comfortable.
Of course, there are certain circumstances where you may not want to contribute. If you recently lost your job like millions of Americans have done this year then it may be prudent to conserve that cash and skip your 2008 contribution until you re-enter the job market. Likewise, if your company is experiencing hard times and the prospects for layoffs seem high then there too you might want to bank that money in an emergency fund until you see the lay of the land. I expect the next wave of job firings will occur in the January-February time period. If you survive that then you still have time given that your 2008 contributions do not have to be made until April 15, 2009.
One final note concerning last week’s column “Take Your Minimum Required Distribution Now,” I explained that those who are required to take an MRD must do so by the end of 2008. However, as I predicted, President Bush, on December 23, signed the Worker, Retiree and Employer Recovery Act of 2008. Although your MRD must still be taken for this year, the Act suspends the requirement that all those who have reached the age of 70 ½ years old will need to take a mandatory required distribution from their IRAs in 2009. Better late than never, I guess.