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Chapter 9. IRAs Versus 401(k)s—Which Is ... > Things to Consider for 2002 - Pg. 95

IRAs Versus 401(k)s--Which Is Better? 95 · Tax credit--Save on taxes and have more take-home pay, thanks to the new Child Tax Credit. Single parents earning $75,000 and under, and couples earning $110,000 and under, get the full $600 per child tax credit for 2001 through 2004 ($700 for 2005 to 2008; $800 for 2009; $1,000 for 2010). If you increase your 401(k) contributions by the same amount as the credit (for ex- ample: 3 children [under 17] × $600 = $1,800), you'll save more for retirement, save on income taxes, and have more take-home pay courtesy of Uncle Sam. · Capital gains--If you leave your company and you have shares of company stock in your 401(k) plan, consider keeping the shares. Just do not keep them in an IRA or your new employer's 401(k). The new capital gains tax rates often make it better to pay the tax on your stock's basis (what it cost you to buy it, not its appreciated value) now and cash in later, when you will be taxed at a 20 percent rate (or 18 percent, if held for five years). This sure beats paying an income tax rate of 27, 30, 35, or 38.6 percent down the road (income rates will drop every two years until 2006). · Educational IRAs and Section 529 plans--Instead of using your 401(k) for the kids' education, consider these better-suited savings vehicles. You can set them up when the kids are born (both) and can continuing saving straight through college (Section 529 plans only). And no income or penalty taxes are assessed when these are used for education. Of course, we hope that you still have money left over to save for retirement. · If you have teenagers--Parents, start the kids off right. If they have earned taxable income during the year, they most likely have spent it all. To help them, why not contribute up to $3,000 (and only up to the amount of their taxable earnings) on their behalf into an IRA? Roth IRA probably makes the most sense because it gives them the most flexibility to use the money during their lifetime--and they will most definitely be in a higher tax bracket in the future. The Least You Need to Know