Investing For Retirement

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Inflation and federal income taxes can erode the returns on your retirement investments. Fortunately, Individual Retirement Accounts (IRA) and employer-sponsored savings plans provide you the ability to defer federal income taxes on your earnings or potentially take qualified distributions that are federal income tax-free.

401(k) plans and 403(b) plans are employer-sponsored retirement plans. For-profit businesses, such as corporations or limited liability companies may offer 401(k) Plans to their employees. 403(b) plans are similar to 401(k) plans, but they are for employees of nonprofit organizations and public education institutions. Only employees of organizations granted 501(c)(3) status by the IRS qualify for 403(b) plans.

• You can contribute a portion of your salary to an employer plan on a pre-tax basis up to certain limits. Occasionally, the employer matches some percentage of your contribution up to a set percentage of your salary. You should attempt to contribute to your 401(k) or 403(b) at least enough to obtain the entire match offered by your employer.
• You allocate your contributions to various types of employer-offered investments, based on how much risk you are willing to assume.
• Your investments grow federal income tax-deferred until you withdraw the money during retirement.
• A special catch-up contribution exists for an individual who has reached age 50 by the end of the tax year for employer-sponsored plans and who has already made the annual maximum allowable contribution to their employer-sponsored plan. In 2007, a qualified individual may contribute an additional catch-up contribution up to $5,000. Catch-up contribution amounts will increase after 2007 based on inflation rates in $500 increments.

Note: Depending upon the applicable laws of your state, your earnings on these plans may be subject to a state income tax in addition to a federal income tax.

Individual Retirement Accounts (IRA) are federal income tax-advantaged accounts. They are not investments in their own right, but rather they “house” investments. An IRA can be opened using various investments, such as mutual funds, individual securities with a brokerage firm, certificates of deposit at banks or an annuity with a life insurance company.

Depending on the type of IRA, earnings may or may not be taxable for federal income tax purposes when you begin making withdrawals. A financial planning professional can help determine which IRA is best for you.

• With a traditional IRA, you can contribute a maximum of $4,000 in 2007 and $5,000 for 2008. For married couples filing jointly where only one spouse has earned income, for 2007 up to $8,000 ($10,000 in 2008) may be split between a spousal IRA and an individual IRA, with no more than $4,000 ($5,000 in 2008) being deposited in either account. Taxpayers who are age 50 or older by December 31 can make an additional $1,000 contribution to their IRAs for 2007 and beyond.

  With a traditional IRA, you may be able to deduct your contribution from your taxable income, thus reducing current federal income tax. This depends on your income and if you are covered by a retirement plan at work. While your money grows, federal income tax is deferred. You are subject to federal income tax when you withdraw the money, generally at retirement. Even if you cannot deduct an IRA contribution from your income, you may still make the contribution if you have earned income.

  If you and your spouse meet certain income limits, you can also deduct up to the maximum IRA contribution each year for your nonworking spouse or your spouse who works but is not covered by a retirement plan.

  You may begin withdrawals from an IRA at age 59½ without a 10 percent penalty; you must begin withdrawals by April 1 following the year you reach age 70½. If you withdraw before age 59½, you generally will be subject to a 10 percent penalty, in addition to federal income tax. Withdrawals can be made without penalty for certain situations, including qualified first-time homebuyer expenses, qualified education expenses, unreimbursed medical expenses, medical insurance if the account owner is unemployed and in the event of the IRA owner’s death or disability, as defined by the Internal Revenue Code.

• With a Roth IRA, you can contribute up to $4,000 in 2007 and $5,000 for 2008. For married couples filing jointly where only one spouse has earned income, for 2007 up to $8,000 ($10,000 in 2008) may be split between a spousal IRA and an individual IRA, with no more than $4,000 ($5,000 in 2008) being deposited in either account.

  Taxpayers who are age 50 or older by December 31 can make an additional $1,000 contribution to their Roth IRAs for 2007 and beyond.

  Investing in a Roth IRA should be considered long term. You can withdraw contributions at anytime from a Roth IRA without penalty or federal income tax. However, if you withdraw earnings before the account has been open at least 5 years or before age 59½ , you are generally subject to federal income tax and a 10 percent penalty on the amount of earnings withdrawn. There are exceptions to this penalty for certain situations, including qualified first-time homebuyer expenses or due to the Roth IRA owner’s death or disability as defined by the Internal Revenue Code. Special rules apply for withdrawals of money in a Roth IRA that were converted from a traditional IRA.

• A special catch-up contribution exists for an individual who has reached age 50 by the end of the tax year. In 2007, a qualified individual may contribute an additional catch-up contribution up to $1,000 above the annual maximum allowable IRA contribution. Catch-up contribution amounts will increase after 2007 based on inflation rates in $500 increments.

The Roth 401(k) and the Roth 403(b) are employer-sponsored plans similar to a 401(k) or 403(b); however, the contributions are not deducted from your taxable income (no immediate tax savings). With these plans, the employee essentially pays the tax up front and can take qualified distributions free from federal income tax at retirement. Your decision is if you want to be taxed now or taxed later. A number of factors come into play when deciding between the two, such as years until retirement, current tax bracket and tax bracket during retirement.

Roth Vs. Traditional IRA

1. You cannot deduct your contribution to a Roth IRA from your taxable income for federal income tax purposes.
2. Qualified withdrawals of earnings from a Roth IRA are free from federal income tax.
3. There is no mandatory requirement to withdraw money during the Roth account owner’s lifetime.

To access the IRS Publication 590, Individual Retirement Arrangements, visit www.irs.gov. Type in the keyword “590.”