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The time you definitely will not want to discover that your purchasing power has eroded over the years is when you are ready to retire.
Retirement may seem distant, but you should begin investing
for it nonetheless. Why start now?
- The sooner you begin, the more money you may be able to accumulate.
- You cannot foresee how long you will be able to work.
Injury, illness or other difficulties could interrupt
your future earning and saving ability.
- You do not know how long retirement will be.
With longer life expectancy, you could need enough
savings to last 20 to 30 years or more.
Take time to understand the following investment options.
You may want to consult a financial planning professional for
in-depth guidance about the best choices for your situation.
Individual Retirement Accounts (IRAs)
These tax-advantaged accounts are not investments in their
own right, but rather they "house" investments.
An IRA can be opened using investment instruments such as
mutual funds or individual securities with a brokerage
firm, bank CDs or a life insurance company annuity.
Depending on the type of IRA, distributions may be taxable for federal income tax purposes upon withdrawal.
A financial planning professional can help determine
which IRA is best for you.
| Traditional IRA |
Roth IRA |
| Any individual under age 70½ with earned income is eligible. |
Any individual with earned income is eligible, regardless of age. |
| Qualified individuals under age 50 may
contribute a maximum of $5,000 for 2009.
(After 2009 the contribution limit will be indexed to inflation.) |
Qualified individuals under age 50 may contribute
a maximum of $5,000 for 2009. (After 2009 the contribution
limit will be indexed to inflation.) (Contributions are phased out
for individuals with modified adjusted gross income (MAGI) exceeding
certain limits.) |
| For married couples filing jointly where only one
spouse has earned income, $10,000 for 2009 may be split between
a spousal IRA and an individual IRA with no more than $5,000 being
deposited in either account. |
For married couples filing jointly where only one
spouse has earned income, $10,000 for 2009 may be split between
a spousal Roth IRA and an individual Roth IRA with no more than $5,000
being deposited in either account. |
| Taxpayers age 50 or older by December 31 can make an
additional $1,000 contribution. (After 2009 the contribution limit will
be indexed to inflation.) |
Taxpayers age 50 or older by December 31 can make an
additional $1,000 contribution. (After 2009 the contribution limit will
be indexed to inflation.) |
| Contributions may be deductible from your
taxable income for federal income tax purposes depending on
how you file your income tax return; whether you or your
spouse participate in a retirement plan at work; and the
amount of your modified adjusted gross income (MAGI).
Even if you cannot deduct an IRA contribution from
your income, you may still contribute if you have earned income. |
Contributions are not deductible for federal
income tax purposes. |
| Generally, money distributed to you from your
IRA before age 59½ is subject to federal income tax and a 10% penalty. |
Contributions may be withdrawn without penalty or
federal income tax. Generally, earnings withdrawn before the Roth IRA
account has been open at least 5 years or before age 59½ are subject
to federal income tax and a 10% penalty. |
Withdrawals can be made without penalty
for certain qualified distributions including the following.
- Qualified first-time homebuyer expenses (subject
to a lifetime limit of $10,000).
- Qualified education expenses.
- Medical insurance if the account owner is unemployed.
- In the event of the IRA owner's death or disability as defined by the Internal Revenue Code.
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Withdrawals of earnings can be made without penalty for
certain qualified distributions including the following.
- Qualified first-time homebuyer expenses
(subject to a lifetime limit of $10,000).
- In the event of the 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.
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| Mandatory withdrawals required at age 70½.* |
There is no mandatory requirement to withdraw
money during the Roth IRA owner's lifetime. |
*For 2009 only, there is no required minimum distribution.
Roth Vs. Traditional IRA
A Roth IRA differs from a traditional
IRA in three important ways.
- You cannot deduct your
contribution to a Roth IRA from your taxable
income for federal income tax purposes.
- Qualified distributions
of earnings from a Roth IRA are free from
federal income tax.
- 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."
401(k) And 403(b) Plans
These employer-sponsored retirement plans allow participants
to invest a portion of their salary on a pre-tax basis up to
certain limits
401(k) Plans
- May be offered by for-profit businesses, such as corporations
or limited liability companies.
- Employees may invest a portion of their salary in an employer
plan on a pre-tax (and/or after-tax) basis up to
certain limits.
- Some employers match a percentage of the employee's contribution, such
as 50 cents for every $1 contributed up to a set percentage of salary.
Generally, participants should invest at least enough to get the entire employer match.
- Distributions may be made for retirement, death, disability, separation
from employment, reaching age 59½ and hardship as defined in the
plan description.
- Some 401(k) plans permit loans in certain circumstances.
- In most cases, you must pay federal income tax and a 10% penalty
for withdrawing funds before age 59½.
- Some 401(k) plans also have a Roth 401(k) feature that allows employers
to contribute after-tax dollars. Earnings grow potentially tax-free.
403(b) Plans
- May be offered by nonprofit organizations and public education institutions.
Only employees of organizations granted 501(c)(3) status by the
IRS qualify for 403(b) plans.
- Work similarly to a 401(k) plan.
- Are a major retirement planning vehicle for school teachers and hospital workers.
- With some exceptions, withdrawals made before age 59½ are subject to federal income
tax and a 10% additional early distribution penalty.
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.
You decide whether 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.
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Basic Money Management
Basic Money Management
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