2010 Brings Lower 401k Contribution Limits – What You Can Do Now

Whether you're just getting started in your retirement planning or you've been a lifelong saver, important and expected news is coming for your 401k program.  Chances are high that in 2010, the federal government may actually lower the annual contribution limits of your 401k due in part to nonexistent inflation statistics.

How Will I Be Affected?

Without a serious uptick in consumer prices in the last quarter of the year, analysts are expecting that the average family will not be legally allowed to invest as much in their 401k as they were in 2009.  In 2009, individuals under 50 could invest as much as $16,500 to a 401k program, and those 50 and older could tack on an additional $5,500 for a total of $22,000.

In 2010, however, it appears that investors will only be able to invest as much as $16,000 per individual, with the $5,500 “catch-up” amount remaining the same for investors over the age of 50.  Defined contribution plans will also encounter a lower limit, with the maximum contribution likely to fall as low as $48,000 in 2010.

Unfortunate Timing

Unfortunately, for investors, the timing for the new low limits is possibly the worst it could be.  Investors, who have seen their accounts halved as the stock market fell, are unable to invest directly in 401ks to better dollar cost average their positions.  However, it now appears that the financial crisis is behind us and economic indicators are picking up, making 2010 a prime time to invest.

In addition, many localities should be flush with cash starting in 2010 with the help of the $787 billion stimulus package, which will divest as much as 50% of the total cost of the bill in 2010 alone.  Those efforts, combined with economic stabilization, should help ease the dip in consumer confidence and spending, providing many good opportunities in the stock market in 2010.

How to Beat the Limits

Investors who find that the limits are not suitable for their investing strategy should take a look at either an IRA or a Roth IRA.  Investors 49 and younger were able to invest as much as $5,000 into an IRA in 2009, but it is likely that these limits will drop as well.  Those 50 years of age and lower were granted an extra $1000 for a total annual contribution of $6000.  IRAs allow significant headroom for investors to make use of today's low prices.  Investors younger than 49 should be able to invest as much as $21,000 in both an IRA and a 401k, while those 50 and over should be able to invest as much as $27,500.

Stocks Are on Clearance

Interestingly enough, the Dow Jones Industrial Average closed at the same price on September 11, 2001 as it did September 11, 2009.  Although the dates are interesting to peruse, they aren't particularly important.  What is more important is the fact that today's investor can buy stocks at the same price they could have eight years ago.  The opportunities present today are unlike any we've ever seen, especially with prices dipping as far back to 1998 during the worst of the financial fallout.

Pick up Where You Left off

If you've been in the market for the past eight years, you have most likely purchased many top notch businesses at much higher prices than they're worth today.  This shouldn't be a warning, but rather an opportunity to bring the average cost per share down to what they're trading today.

Economic analysts are expecting a full recovery to begin in the second half of 2010, and it would be unwise to wait for the returns to come to you.  Promise yourself to invest more now, while stocks are at their lows, to take advantage of the huge upside opportunities present in today's market.  If you still have time before your planned retirement date, there is even more time to profit and grow your retirement account along the way.

Keep an Eye on Yields

Despite their significantly lower stock prices, many companies have yet to lower their dividends.  This creates an excellent opportunity to allow dividend yields to help you better compound your portfolio.  One of the historically best dividend yielders is Philip Morris International, Inc. (PM), which at its current price, is yielding investors more than 4.6% per year.  That return, though it may seem minimal, is more than three times the return of your average savings account and nearly in line with many corporate bonds.  At these prices, toss fixed income off to the side, invest in high dividend companies that return solid yields back in the form of dividends, and when the time comes, take advantage of the spike in capital gains as these beaten stocks turn higher.

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