Category Archives: roth IRA

Saving for Retirement: 40 Years to Go

Posted on May 12, 2012 by admin

If you have just graduated from college or are in your twenties, saving for retirement can seem like an almost ridiculous proposition. After all, that’s decades away, and right now there are so many other financial needs that seem so pressing, such as paying off student loans and credit card debt, saving for a house and trading in the clunker that you drove while you were in school for a better ride. But this is absolutely, positively the most critical time in your life to save for retirement as well. The great thing at your age is you don’t have to save a fortune in order to get a good head start on your nest egg; the important thing is just to start somewhere as soon as you can. Time to Grow The most important retirement planning asset that you have in your twenties by far is time. When you have decades to let your savings grow, then you don’t have to save a fortune now in order to get where you need to be by the time you stop working. If you can sock $10,000 away in a retirement plan or account of some sort by the time you’re 27, then you have 40 years for that to grow before you reach your normal retirement age. If that money were to grow at an average rate of 6% until then, then you would retire with almost $103,000. If you were to earn 8% a year on that money, you would have over $217,000 and 10% growth per year would leave you with over $452,000 by age 67.  And that’s assuming that no further contributions are ever made! So How Do I Get Started? Retirement planning for you at this age is very simple. Start by opening either a Roth IRA or participating in the qualified retirement plan offered by your employer (and make Roth contributions if possible). Roth IRAs and plans are superior to traditional retirement accounts because the money that you take out of them at retirement is tax-free, instead of taxed as ordinary income as with the previous plans. Contributions to Roth plans and accounts are nondeductible, but not having to pay tax on your distributions will more than make up for this the vast majority of the time. At your age, you should be focused exclusively on long-term growth, because you have time to ride out the ups and downs in the markets . Don’t be afraid to put your money into some aggressive investments such as technology or healthcare funds, because over time they are likely to appreciate substantially in price. For more information on saving for retirement, consult your financial advisor. Continue reading →

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Saving for Retirement – 30 Years to Go

Posted on May 9, 2012 by admin

If you still have three decades to go before you stop working, then it may be tempting to put off saving for retirement for a while yet, especially since you have so many other expenses in your life right now, like a mortgage payment, car payments, childcare expenses and college education funding for your kids. And how you save for retirement at this point will depend to some extent on how much you were able to save in your twenties . If you were fortunate (or disciplined) enough to pack away $20,000 or more into your retirement savings, then you may be able to get away with easing off on your retirement contributions for a while in order to concentrate on other things. But if you have not yet started to save for retirement, then now is the time to do so. However, saving money in IRAs and employer plans may not be all you can do to prepare for your nonworking years. Start with Your Employer If your employer offers a retirement plan of any kind like a 401(k) plan or 403(b) plan, then this is probably a good place to start your retirement plan if you haven’t already, especially if they offer any kind of matching contributions. Be sure to contribute to the Roth portion of the plan if this is available, because it will allow you to take tax-free distributions from your account at retirement (although any matching contributions will still be taxable because they can only be made on a pretax basis). Otherwise you should open a Roth IRA with a mutual fund company or investment firm that will allow you to invest in stocks or stock mutual funds (a much better alternative if you’re not a sophisticated investor). But your money needs to be growing faster than inflation over time, and equities and real estate are the only two asset classes that have consistently outpaced inflation over the decades. You may want to allocate a small portion of your portfolio into bonds or cash just for the sake of diversification, but your primary focus in your retirement savings at this point should still be growth. Look at Your Debt Retirees who don’t have to make a mortgage payment can live on a great deal less than those who do , especially if they have their mortgages completely paid off before they stop working. It may be wise to refinance to a 15 year mortgage, especially if interest rates are low, as this will save you thousands of dollars in interest payments that you can use instead to pay for education or retirement expenses. For example, if you refinance a $150,000 mortgage from a 30-year loan at 6% to a 15-year loan at 4%, then you have just saved yourself nearly $125,000 in interest over the full life of the loan (obviously, the amount saved will probably be somewhat less depending upon the amount of your mortgage that you have already paid off). If you can’t afford the payment for a shorter loan, consider refinancing for the same term and then do a biweekly mortgage, where you make 26 half-payments per year. This will shave about 8 years off of a 30-year note and about 3 ½ years off of a 15-year note. Those who do this now may even be able to pay off their home loans by the time their kids get to college. Retirement of other debt such as student loan payments and car loans can also be wise moves, because this will free up cash flow for you in the future with no investment risk. For more information on saving for retirement in your 30s, consult your financial advisor. Continue reading →

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Understanding Non-Qualified vs Qualified Retirement Plans

Posted on May 8, 2012 by admin

In the investment world there are some terms that apply to the investments themselves, and other terms that only apply to the vehicles chosen to hold those investments.  The easiest way to understand a qualified retirement plan is to think of it in terms of “qualified for tax benefits.” These rules are set by the IRS and when an account meets the specifications, it is deemed to be qualified.  Many people already have a qualified plan without even knowing it.  If you have any money in a 401(k), a traditional IRA, or a Roth IRA, you have money invested in qualified retirement plans. When money is put into most qualified plans, a person will see their taxable income reduced by the amount put into the plan (the exception of course being the Roth IRA, learn more here ).  Until the money is taken out of the qualified plan it will not be taxed.  So a person can buy and sell funds, often at substantial gains, and until they actually withdraw the money they will not be liable to pay any taxes.  The downside of these plans is the money is assessed at least a 10% penalty ( 25% in some instances ) if it is withdrawn before the age of 59.5, unless it qualifies for some of the early distribution rules .  The reason behind this rule is simply to encourage people to save for their retirement, instead of pulling the money out whenever they feel the urge. The opposite, a plan that is “non-qualified for tax benefits,” is a plan that does not meet the rules set by the IRS.  These accounts are designed for those who earn too much to put money into an individual qualified account, have maxed out their contributions, or they are accumulating money for a big purchase that will happen before they reach retirement age.  A non-qualified account can be set up as an individual account, a joint account (with a husband and wife team most often being the joint owners), or an entity account (often a trust, or an estate owning the account).  Regardless of who or why the account is set up there are some pros and cons to any non-qualified account. The biggest downfall to this type of account is that all the realized gains are taxable.  This means if a stock or fund is bought at a certain price, all the gains will be “realized” when the stock or fund is sold and those gains are locked in.  At this point they are counted as income (if it was held under one year) or long-term capital gains (if it was held over one year) and the investor will receive tax documentation to report the gains the following tax season.  All dividends and capital gains are taxed, even if they are reinvested and not taken as cash. Even though gains are added to a person’s taxes, losses are subtracted from them.  If a person has unrealized losses in their account, they can sell their holdings and get a deduction on their taxes.  More can be learned about this process here . Since these accounts are taxed as they go along, the IRS does not assess a penalty if the money is taken out before age 59 ½.  At any point a person can add to, or withdraw from the account.  There is no limit set on contributions or distributions. Finding the right investment account is important for anyone who wants to store money for the long run.  A non-qualified account might hit them with a tax burden before they want it, and a qualified account may tie up their money for too long before they need it.  However, most people who are just getting started investing can benefit from the forced discipline a qualified account will offer.  In the next article we will explore the various types of qualified retirement plans and what they can do for those planning their retirement. Continue reading →

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Saving for Retirement Using 401Ks, Traditional IRAs and Roth IRAs.

Posted on May 2, 2012 by admin

Most people will investment to help them save for retirement.  For much of the population retirement is still a long ways away.  For many people retirement may be further away than previously thought .  With a little planning now, and understanding which type of account to use, a person can make headway toward retiring when they want, with the lifestyle they desire. The most popular way to save for retirement is in a 401(k) plan.  These plans are offered by nearly all the major companies, and most people have the opportunity to invest in their company’s 401(k).  The setup process is quick and easy.  Many companies have even switched to automatic enrollment when a person starts working or becomes eligible (some companies require a minimum amount of service before allowing a person to enroll).  The employee can select how much they want to come out of each paycheck, either a dollar amount or a percentage (for 2012 a person can put in up to $17,000 with some special rules for those over 50 years old ).  The employer will often match a certain portion of what the employee decides to contribute.  The money to be invested will come out of the employee’s paycheck before taxes.  It will then grow in the plan only to be taxed when it is finally withdrawn.  As long as a person waits until after the age of 59.5 the withdrawals will only be subject to taxation at the participant’s current tax bracket.  These plans are subject to the required minimum distribution rules. While most companies will offer a 401(k) plan, there are some that offer different types of employer sponsored plans.  For those who are self-employed with no employees, the Simplified Employee Pension (SEP) IRA could be an option.  With this plan a person can put up to $50,000 (or 25% whichever is less) in 2012.  The rules are basically the same as a traditional IRA, with the catch that if there are any employees, the employer must put in the same percentage to each of the employees as he or she puts into his or her own plan.  For those with employees, a Savings Incentive Match Plan for Employees (SIMPLE) IRA may be a better choice.  With a SIMPLE IRA the employer must follow some rules for matching contributions , but otherwise the employee decides how much he or she wants to contribute, up to 100% of their salary or $11,500 whichever is less.  There are a few other more complicated employer sponsored plans out there (ESOPS, Profit Sharing Plans, Pensions, and Deferred Compensations) that are fundamentally the same: they will provide assets to be used in retirement. After a person has reached the contribution limits for their employer sponsored plan they can still set up an Individual Retirement Account (IRA).  The Roth IRA and the Traditional IRA both provide a great platform for investing money for retirement, and allow the investor tax benefits along the way. The downside of many of the retirement savings vehicles is that there are income limits or contribution limits.  For example: a married couple whose adjusted gross income is over $173,000 will not be eligible to contribute to a Roth IRA in 2012.  There are still options however.  An annuity can be utilized as a great place to store up money for retirement.  There are no income limits to open and fund an annuity, nor are there limits as to how much can be invested into one each year.  The gains in an annuity are tax deferred, and the account can either be taken in lump sums or it can be annuitized into an income stream later in life.  An annuity does not offer quite the tax benefits a qualified account offers, and the company issuing the annuity may place higher than usual fees on the investments, so any annuity contract should be entered into with caution. When it comes to saving for retirement a person will generally have either a 401k or an IRA plan, if not both, they can utilize.  But many people do not take advantage of the plans that are offered to them, and often it boils down to the fact that they simply do not understand them.  By taking just a few minutes to learn how a plan works, and realizing it is really quite simple to invest, anybody can take advantage of investing now in order to have the retirement of their dreams.  In the next article we will look at what accounts, how much, and how often a person should invest. Continue reading →

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Saving for Retirement – 10 Years to Go

Posted on April 28, 2012 by admin

If you’re only ten years from retirement, then it’s high time for you to figure out how much you will need to be saving for retirement and focus on accumulating that amount if you haven’t already done so. Time is running out on your opportunity to get any matching contributions that your employer offers for your retirement plan deferrals and to reap long-term growth in your portfolio. But there are several other issues to consider at this point as well, such as debt and college expenses for children. Fuel Your Contributions If you’ve been slacking off on your retirement contributions because of other expenses, then you should start taking advantage of the extra contributions that are allowed for those over age 50 . You can contribute an extra thousand dollars per year to a traditional or Roth IRA and also an extra $5,500 into your employer-sponsored qualified plan (in 2012). Use these concessions to beef up your retirement portfolio while you can. Evaluate Your Portfolio If you haven’t checked the performance of your retirement portfolio in a while, this is the time to take a careful look at how your money is growing. If your assets are on track to do what you want them to, then you may be wise to leave things as they are. But for many people, it is probably time to start shifting their assets out of equities and into more conservative holdings such as bonds, mortgage-backed securities and cash. Of course, you will not want to eliminate stocks from your savings completely, because you still need to have a hedge against inflation in your portfolio for some time to come. But at least half of your assets should probably be in something other than equities by the time you stop working unless you are an experienced investor who is comfortable taking more risk. Managing Debt If you still have decades to go on your mortgage, it may be wise for you to refinance to a shorter term loan if you plan on remaining in your current residence after you retire. Interest rates are at historic lows, so changing to a 15-year note may be a good idea right now , because the lower rate may offset the shorter time frame. And if you have any high-interest debt, such as credit cards or car loans that are outstanding, you should also concentrate on eliminating those before you stop working. It is much easier-and simpler-to retire when you have no debt; if you have to keep making payments on your debt after you stop working, you may be forced to live low for a long time to come. For more information on saving for retirement, visit the following links or consult your financial advisor. Continue reading →

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Catching Up on Saving for Retirement After Age 50

Posted on March 26, 2012 by admin

Most American workers view age 50 as the beginning of the final phase of their lives before retirement. Many workers’ careers-and living expenses-have peaked by that point and their children are either in college or about to enter, which can pose a major dilemma concerning where their savings dollars get spent. Then there are those who have yet to begin saving at this age, and there are a large number of people in this category. But all is not lost for them; they must simply take a somewhat different (and most likely more austere) path into their nonworking years. And even those with substantial retirement assets have some issues to consider at this point in their lives. If You’re Behind Those who have saved little or nothing for their retirements by age 50 will need to make some major changes in their budgets and lifestyles if they want to retire earlier than age 70. Although Social Security will likely still be there for them, they may not be able to live the kind of lives that they want in retirement if they don’t immediately begin an aggressive savings program. Those without any type of retirement savings should start by maxing out their employer-sponsored retirement plan contributions and probably also make the maximum possible contribution to a traditional or Roth IRA. They should also make the additional $1,000 catch-up contribution if at all possible. A 50 year old earning $60,000 a year who does both these things could accumulate a whopping $225,000 by age 65, plus any growth on the contributions. Lower and middle-class workers who haven’t started to save by age 50 can realistically expect to work at least another fifteen years, unless they earn a phenomenal rate of return on their retirement savings. College Funding vs. Retirement Parents of kids who are at or near college age must inevitably grapple with the dilemma of either funding their own retirement plans or paying for their kids’ college educations. Most financial experts will counsel parents not to forfeit their retirement savings to pay education expenses, because their kids will have the chance to pay off their own expenses themselves eventually. But the use of annuities and cash value life insurance can reduce the amount of assets that must be reported on the financial aid forms, which can increase the amount of financial aid available to pay for tuition and other expenses. For the Savers Those who have been saving diligently since they were young can pat themselves on the back for starting when they should, but it may be time to start adjusting the mix of assets in their retirement portfolios. Workers who are invested entirely in stocks may want to start thinking about reallocating at least some of their savings into more conservative asset classes such as bonds. Those who are invested in target-date funds will have this done automatically, but those who have constructed their own portfolios should make the preservation of their savings a growing factor in their investment decisions. Of course they should still preserve a growth element in their portfolios, but once they get within ten years of retirement they should probably start moving most of their savings from equities to fixed-income securities in an appropriate systematic fashion. For more information on saving for retirement after age 50, consult either IRS publication 590 for IRAs or your financial or retirement adviser. Continue reading →

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When Should I Take Social Security?

Posted on March 23, 2012 by admin

Since its inception during the Great Depression, Social Security has grown to become a primary source of income for retirees in America. After 40 quarters of contributions, those who stop working are eligible to receive retirement and/or disability income and also a small death benefit. However, the question of when to begin drawing this income is not always easy to answer. There are several factors that must be taken into account for this issue, and the right answer will vary from one person to another depending upon their circumstances. Determining Variables The central issue that must be considered when trying to decide whether to begin drawing Social Security is whether one will come out the furthest ahead by drawing benefits early, at full retirement age or later. And several further variables must be considered when trying to answer this question, such as the worker’s level of earnings from age 60 to 70 and their life expectancy. A worker with serious health problems may be wise to begin drawing benefits at age 62, so that they will have received something back from their years of contributions in the event that they die early. Conversely, those with longer life expectancies may want to hold off on starting their payout as long as possible in an effort to receive the maximum possible payout. Workers who have reached their earnings peak just before retirement can also boost their retirement income by working a little longer and waiting to take their benefits. The Investment Option Those who are investment savvy may come out the furthest ahead by taking benefits at age 62 and investing them prudently. Of course, the wisdom of this choice will boil down to the rate of return earned on this principal. For example, if Social Security benefits for an investing worker taken at normal retirement age are $2,000 per month, then early benefits would be $1,500 per month, as these are generally 75% of the normal amount. Therefore a worker who invests this benefit in a Roth IRA for 4 years and receives a 5% average annual return would have approximately $79,000 by age 66, the current normal age for OASDI retirement benefits. If the money in the Roth continues to grow at 5%, then $1,000 could be drawn as a tax-free distribution from the account each month to supplement the $1,500 benefit already being paid. This additional payout would last for 8 years, resulting in a total of $312,000 of retirement benefits and distributions from earnings on benefits over a 12-year period from age 62 to 74, compared to just $192,000 of full Social Security benefits paid out from age 66 to 74. Obviously, failure to achieve the rate of growth in the example shown could negate the benefit of this strategy. The Bottom Line Deciding when to take Social Security is one of the most important decisions that workers must make when they retire. Those who fail to plan adequately in this area may find themselves in serious financial trouble later in retirement. For more information on when you should begin taking Social Security benefits, visit the Social Security website at www.ssa.gov or consult your financial advisor. Continue reading →

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Two Ways You Can Still Reduce Your 2011 Taxes in 2012

Posted on March 21, 2012 by admin

While 2011 has long been over, it’s not too late to reduce your 2011 taxes.  Make sure you’ve done everything you can to lower your 2011 tax bill and improve your finances in the future.  In particular, there are a few key things to do today. Get Reimbursed for Your FSA Spending Submit any remaining receipts to your FSA for reimbursement.  The deadline to submit 2011 receipts for reimbursement can be as late as March 31, 2012.  Check with your FSA plan administrator to confirm its deadline.   If you don’t submit receipts by the deadline, that money will be lost forever. You were smart and put cash into a flexible spending account at work to cover your medical expenses an co-pays with pretax dollars.  You even made sure to make eligible purchases before the new year rolled around.   You put the receipts in a folder and have been waiting for a quiet weekend to organize your FSA receipts.  You’ve already paid the credit card bills so now be smart and submit your 2011 receipts to get reimbursed. If you don’t submit your 2011 receipts and the money in your 2011 FSA account goes unspent, it’s the same as having a tax rate of 100% on your unreimbursed expenses.  Do you really want to pay twice for your FSA-eligible expenses? Max Out Your 2011 IRA Account Contribution Tax-advantaged retirement accounts including IRAs and Roth-IRAS all have annual contribution limits.  If you haven’t made the maximum contributions for 2011yet, you should do so today if you have any wiggle room in your budget to do so.  If you fail to make the max contribution, you also cannot simply make up that difference in subsequent years, so you will forever lose the chance to make that pre-tax contribution if you don’t act fast. Depending on your 2011 income, your traditional IRA contribution can lower your 2011 tax bill.  Earnings on assets that you put in your IRA accumulate tax-free until you take them from your IRA in retirement. Typically, you have until April 15 of the following year to make your contributions, so you could technically make your 2011 contributions up until April of 2012- but why wait if you don’t have to? If you do delay in getting your contributions in until April, make sure to correctly elect to have the cash counted towards the previous year and not towards the current year’s limits. By taking advantage of these simple tips, you can improve your 2011 financial position and make 2012 a little richer. Continue reading →

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Will I Pay Taxes During Retirement?

Posted on March 19, 2012 by admin

Paying taxes during retirement, on your earnings and other sources of income, can drastically reduce your nest egg if you aren’t careful.  But those who plan wisely can often pay little to no income tax during retirement, depending upon their circumstances and living expenses. Even those whose income levels will not drop substantially in retirement will receive some tax breaks that can allow their dollars to go further. Much of this issue depends upon the type of income that you draw in retirement and how it is received. Taxation of Retirement Income Knowing how all of your retirement income is taxed can save you a bundle in some situations. But distributions from any type of Roth IRA or retirement plan are always tax-free as long as you are at least age 59 ½ and have had some sort of Roth plan or account open for at least 5 years. Having access to Roth assets can drastically lower the amount of tax that you pay in some instances, such as when you have to take a large lump-sum distribution. For this reason, it may be wise to draw a regular, lower stream of income from your taxable retirement accounts and let your Roth assets grow. Then, when you need to take out a large distribution, you can take it from the Roth account without substantially disrupting the rest of your finances. And taxpayers who live on modest means may owe little to nothing after their deductions and credits have been subtracted from their gross incomes, especially if their incomes are low enough that their Social Security is not taxable. For example, a married couple that receives $30,000 of Social Security income and $20,000 of taxable retirement plan distributions may have a tax bill of zero, especially if they itemize deductions. (Of course, there are many factors that will ultimately determine the amount of tax that they will pay.) Timing is Everything If you have substantial assets that you need to liquidate during retirement, such as stock that you have held for years outside of your retirement funds, then you should check with your income tax advisor to see if you might pay less tax by waiting until next year to do so. Of course, you may not always be able to wait that long, but there can be times when you could end up paying unnecessary taxes on your gains or retirement plan distributions because you realized substantial income in a single year. Caution should therefore also be used when converting traditional IRAs and retirement plans to Roth IRAs, because the taxable income generated from this transaction can also inadvertently land you in a higher tax bracket. For more information on retirement plan income, visit the IRS website at www.irs.gov or consult your financial adviser. Continue reading →

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Deciding Between a Traditional IRA and a Roth IRA

Posted on March 18, 2012 by admin

In 1982, Congress introduced a revolutionary type of savings account to American taxpayers: the Individual Retirement Account, which allows Americans to save for their retirements on a tax-advantaged basis. Fifteen years later, Congress created another type of retirement savings account called a Roth IRA. This account is taxed somewhat differently than its traditional cousin, but is generally considered to be superior to traditional IRAs in most respects. But the question of which is better is not always as clear-cut as it may seem. Traditional IRAs The original type of IRA offers two main tax advantages. All money that is contributed to a traditional IRA is deductible on the participant’s tax return, with certain exceptions. The money that is placed into these accounts then grows on a tax-deferred basis until it is withdrawn at retirement. All normal distributions that are taken from traditional IRAs are taxed as ordinary income, meaning that they are taxed at the taxpayer’s top marginal tax bracket. Roth IRAs Roth IRAs are considered an improvement over traditional IRAs because distributions from these accounts are tax-free as long as the participant is at least age 59 ½ and has had a Roth account or retirement plan open for at least 5 years. But contributions to a Roth IRA are never deductible under any circumstances. Similarities and Differences All distributions that are taken from either type of IRA before the owner is age 59 ½ are subject to taxation and a 10% early withdrawal penalty. Even Roth money that would be withdrawn tax-free under normal circumstances will be taxed in this manner. However, all contributions made to a Roth IRA can be withdrawn at any time without tax or penalty, although they cannot be replaced. Which is Better? The question as to which type of IRA is better for someone can only be definitively answered on a case-by-case basis. But many financial planners and experts maintain that Roth IRAs are generally superior to traditional IRAs for most people. Although it’s nice to be able to take a deduction for your contributions into a traditional account, the tax ramifications can be quite ugly for those who take large lump-sum distributions from a traditional IRA. If you have to take $100,000 out of a traditional IRA in a single year, then you face a triple tax whammy. First, you will most likely ratchet yourself into a higher tax bracket. Then you will pay tax at that higher rate on the entire distribution. Finally, you will have to pay that higher rate on all other forms of your ordinary income, such as investment income, earned income and pension income. You will most likely pay more tax on your Social Security income as well. But those who take a small stream of income from their traditional IRAs may face little or no real tax consequences, depending upon their level of income and other factors. For more information on traditional and Roth IRAs, download Publication 590 from the IRS website at www.irs.gov or consult your tax or financial advisor. Continue reading →

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