Open enrollment: Tax-savvy benefit selections

Open enrollment is a time of opportunity. Take action with the following tax tips and talk with your financial advisor and tax professional.

Retirement selections: 401(k) or IRA, Roth or traditional?

Individual circumstances may call for different approaches, but these tips may help you evaluate your retirement plan benefits:

Get the 401(k) match. Why say "no" to free money? Your employer matching contribution is like an optional bonus. Don't miss out on it. If, for example, your employer matches 50 cents for every dollar that you contribute, up to 6% of your annual salary, then contribute at least that amount. On top of adding to your long-term retirement savings, it's like a 3% salary bonus.

Tap into IRA advantages. Once you've contributed enough for the full employer match, consider investing in an IRA. IRAs offer a number of advantages that could complement your participation in a 401(k).

• Traditional IRAs may offer a tax deduction based on your income. However, for participants in an employer-sponsored retirement plan, eligibility for the tax-deduction phases out at $55,000-$65,000 in modified adjusted gross income (AGI) for singles and $89,000-$109,000 for married couples filing jointly.
• Non-deductible traditional IRAs: Even if you aren't eligible for the tax deduction, you can contribute to and benefit from tax-deferred compound growth with a non-deductible IRA. This is appropriate when your income is too high to qualify for a Roth IRA. You can also convert your non-deductible traditional IRA to a Roth IRA beginning in 2010 when income limits are removed.
• Roth IRAs : Though they don't offer an up-front tax benefit, your money can grow tax-free and your withdrawals will be tax-free if conditions are met. Roth eligibility phases out for single filers earning $105,000-$120,000 in MAGI ($166,000-$176,000 for married couples filing jointly).

One advantage is that Roth IRAs have no required minimum distributions. This gives you more choices when planning your withdrawals. If you don't need the money, pass it on tax-free to your beneficiaries.

You can withdraw your Roth IRA contributions at any time for any reason. Your contributions always come out first and are non-taxable. In comparison, to access money in your Roth 401(k), you must have an event occur that allows you to get money out of the plan and for any non-qualified Roth 401(k) withdrawal, assets come out pro-rata. For example, if half of your Roth 401(k) balance is from after-tax contributions and half is from earnings, half of any withdrawal would be taxable if you didn't meet the conditions for a tax-free withdrawal.

IRAs generally offer flexibility to satisfy complex beneficiary and estate planning issues. For example, a Roth IRA can be used to allow non-spouse beneficiaries to stretch their distributions throughout their lives.

Health Savings Accounts

You may have a choice of savings accounts to help pay for medical costs. They're similar but have some key differences.

	Flexible Savings Accounts (FSAs)	Health Savings Accounts (HSAs)
Helps you pay for health care and dependent care that isn't covered by your health plan	X	X
Enables you to save money on a pretax basis	X	X
Decrease taxable income/increase spendable income through tax deductible contributions	X	X
Money left in the account at year end is forfeited (use it or lose it)	X
Savings can be used to pay for current health care costs or future needs		X
The account is portable: The money isn't tied to a particular plan or calendar year		X
Unused funds can continue to compound tax-free over many years, even into retirement		X

Choose between dependent care benefits

If you have a young child and are eligible for dependent care benefits, you may use either a Dependent Care Flexible Savings Account or claim a dependent-care tax credit of up to $3,000 of expenses paid for one child or $6,000 for two or more dependents. If you aren't sure which option works best for your tax situation, discuss this with your financial advisor or your tax advisor.

Commuter tax benefits

This includes pre-tax or tax-free benefits such as parking, vanpool/shuttles, carpooling, discounts/coupons for bicycles/walking shoes, and transit passes. You may be able to save money or earn tax-free benefits while doing something to help the environment.

Selecting the best benefits

Making tax-savvy benefit selections can be far from straightforward. You may have to weigh a variety of financial planning questions plus tax liability. And there are questions about how long certain benefits may remain available, as many companies look to save money in response to cost increases and financial pressures.

Lastly, for some companies, open enrollment is the time to change tax withholdings. This and other open enrollment selections can be complex and involve balancing a variety of issues. Talk with your financial advisor and tax professional to determine what's best for you and your family.