Getting Retirement Advice from a Financial Advisor

If you are planning for your retirement it is a good idea to meet with a financial advisor. You may have a number questions. After all, soon-to-be retirees want and should have all of their bases covered. Of course, you can find retirement advice online or seek answers from those you know, but there a number of benefits to meeting with a professional financial advisor. Here are five reasons that are outlined below.

1 – Knowledge and Expertise

While anyone can claim to be a financial advisor, a small amount of research or recommendations from those that you know can help you ensure that you are dealing with a true professional. When doing so, you should receive valuable information. Most financial advisors are trained and experienced in the world of finance, as well as retirement. You might want to consider a Certified Financial Planner (CFP) who is a professional that has passed certain testing and experience requirements. In general, you should feel comfortable and trust the advice given to you by a financial advisor.

2 – Realistic Goals

Another benefit to meeting with a financial advisor is that he or see can make sure that your feet are on the ground. Unfortunately, many men and women get carried away with their retirement goals. If you want to start a business, you may be able to so. If you want to spend your days vacationing, you should also be able to do so. But, only if you have enough money saved. A financial advisor can let you know if it is even possible for you to meet your retirement goals in the remaining time that you have left to save.

3 – A Good Value for the Money

Scheduling a meeting with a financial advisor will cost you money and this is a problem for some. After all, to save for retirement, you are supposed to be saving money and reducing your expenses. While this is true, meeting with a financial advisor can be considered an investment. The small appointment fee is one that you can easily make a return on, should you adhere to the advice provided by your financial advisor.

4 – Easy to Schedule an Appointment

Many soon-to-be retirees donít want to go through the trouble to find and then schedule an appointment with a financial advisor. Doing so doesnít have to be difficult. First, ask for recommendations from those that you know and then call to make an appointment. The internet can also be used to research and find quality and reliable advisors. Your local bank may also be able to provide you with assistance.

5 – The Consequences

The consequences of not meeting with a financial advisor or not being prepared for your retirement are enough reason why you should schedule an appointment. At this point in your life, you should have been contributing to your 401(k) and you should also have an Individual Retirement Account (IRA) with money in it. If not or if you donít even know what these accounts and plans are, you need to meet with a financial advisor right away.

As you can see, there are a number of benefits to scheduling an appointment with a financial advisor. A financial advisor does more than an accountant. In addition to helping you save money, they can also help you determine exactly how much money you need to retire comfortably. Yes, you can develop this total on your own, but financial advisors know to take other factors into consideration as well, such as medical emergencies and inflation. Do you?

Have You Set Up Your Retirement Plan Yet?

Do you have your retirement funds tied up in your company’s plan? Are those investments working for you? Or are you an individual interested in retirement planning but have yet to decide on which plan to choose? Do you know what time of investments yield a higher rate of return? If you want more information about how 401k, IRA, Roth Ira plans work and which investment choice provide the best return this article is for you.

First let’s take a look at 401K plans. 401K retirement plan accounts are established by your employer and are offered as part of your benefit package. Generally, you invest a certain percentage of your income and your employer may or may not match your contribution. You are provided with a list of possible investment choices that are usually made up of stocks, bonds and municipal funds.

Your investment grows when the companies that you are invested in realize a profit and your investment decreases if the companies realize a loss. In most years, and with wise investment decisions, you may realize approximately an 8% growth. The money put into these accounts is tax-deferred until you withdraw them.

There are several advantages to opting for a company sponsored retirement plan. The money contributed is both tax deductible and tax-deferred. You are able to borrow against these funds if a hardship occurs or you are paying for your kids college or purchasing new home. However, there are some disadvantages to this type of retirement planning as well. First, if you withdraw the money before you are 59 1/2 you may have to pay an additional 10% penalty on the money. Second, you must start withdrawing the money at a government mandated minimum when you reach 70 1/2.

If you have decided that you need additional retirement savings, or are not covered by your company; you can opt to set up your own retirement plan. There are a few choices here. However, most people choose either a traditional IRA or a Roth IRA account.

A traditional IRA works much the same way as a 401K. The money you put into this type of account is tax-deferred so you won’t have to pay taxes on it until you start taking it out. It also has the same penalty clause and you still are required to take the money out when you reach 70 1/2

The difference between a Roth IRA and a traditional IRA is that with a Roth you pay the taxes on the money as it goes in to the account but do not pay again when you withdraw. Also, because you have already paid your taxes, you do not have to withdraw the funds before you are ready.

With a company sponsored 401K plan, you do not have much of a choice in how your money is invested. However, with a Roth IRA you make those decisions for yourself. A financial advisor must be consulted to insure your decisions are within federal guidelines and to the do the paperwork, but you are in charge.

People do their retirement planning through a Roth IRA account often find that choosing to invest in real estate is their best option. This is for two reasons: investing in real estate is usually safer than investing in traditional financial instruments, and; the rate of income earned by these investments can be almost double that of those other investments. It is something to consider.

Having a retirement plan in place is essential to your future financial well-being. Choosing the right retirement plant and the right investment choices will insure your retirement will be all that you hope it will be.

Rich Eng

Spend Your IRA First – Maximize Your Social Security

Ask almost any financial planner if you should spend your IRA first or last and you will be told to spend your non-qualified (after tax) savings first and your qualified (IRA, 401K, 403B) funds last. Recent research has shown this is not necessarily the best way to use your retirement funds. For the sake of brevity, we will refer to the qualified plans as IRA in the rest of this article.

Most retirees will receive their retirement income from a combination of their non-qualified savings, their IRA, and from Social Security and/or a pension. Income tax must be paid on the funds coming from the IRA, Social Security, and the pension. You were already taxed on the principle of your non-qualified savings so only the dividends, capital gains, and interest will be taxable on them. The dividends and capital gains receive lower taxation than your normal tax bracket.

One reason to spend your IRA first is to use it to delay taking Social Security until age 70. This will increase your Social Security benefit by approximately 162% over taking it at age 62 and by approximately 135% over taking it at age 66.

By maximizing your Social Security benefit at age 70, you are taking advantage of a monthly income stream guaranteed by the United States Government that is adjusted for inflation. Where else can you find income of that quality in the financial markets?

Inflation has to be a concern of retirees since it can substantially erode retirement savings. By maximizing the amount of your Social Security benefit, you are minimizing your exposure to future inflation.

If you read the current financial press, many writers are predicting inflation to increase in the future. Even now with the increase in oil prices, food prices, and prices of other items, we are seeing a short term increase in inflation. If inflation continues to rise in the future, you need to have a plan to minimize its impact on your retirement. Social Security will shield that part of your income from inflation so maximize your Social Security benefit.

Another reason to spend your IRA first is to save taxes during your retirement and give you more after tax income to enjoy in your retirement.

Every dollar of your IRA is taxable when you withdraw it. You were allowed to deposit it into the IRA tax-free, but now is the time to pay Uncle Sam. The concept is that you put the funds in the IRA when you were working and in a high tax bracket so you could withdraw them in retirement when you were in a lower tax bracket.

What if taxes are increased? This will increase the tax you pay on your IRA withdrawals. Unfortunately, it appears taxes will increase during your retirement to support Social Security, Medicare, War on Terror, and other government programs.

Spending your IRA first can also lower the amount of tax you have to pay on your Social Security benefits. This will be covered in detail in another article.

In summary, spending your IRA first can increase your Social Security benefits, lower your tax exposure from potential tax increases in the future, and lower the tax you pay on your Social Security income.

PART II

Previously, we explored why it was best to spend your IRA first. The first reason was to delay taking Social Security until age 70 to maximize the inflation adjusted income from a safe source, the United States Government.

The second reason was to have the IRA withdrawals taxed under the current tax structure since it is highly probable that tax rates will rise in the future. If you delay your IRA withdrawals, they may be taxed at a higher rate.
The third reason that was not covered in detail in the previous article is to reduce the amount of money that you will have to pay on your Social Security benefit income. We will cover this reason in detail in this article.
It may come as a nasty surprise to retirees that income tax must be paid on Social Security benefits if what the Internal Revenue Service calls your “provisional income” is over a certain limit. Provisional income is figured by summing your adjusted gross income, your tax-exempt income, and one-half of your Social Security income.
The more income you receive, the larger your provisional income will be, and the more tax you will pay on your Social Security benefits
.
If you are married and your provisional annual income is over $44,000, you will be in the higher tier of provisional income and you could pay tax on up to 85% of your Social Security.

When you spend your IRA first and maximize your Social Security income, you will draw less from your IRA since more of your retirement income will come from your Social Security. This lowers your adjusted gross income which in turn lowers your provisional income. Lower provisional income lowers your taxes on Social Security. This gives you more after tax income to enjoy in your retirement.

Let’s take the case of two married couples who file jointly. They plan for $70,000 per year retirement income. For sake of simplicity, let’s assume that both couples have the same Social Security benefits at their normal retirement age and both have the same amounts in their IRA’s.

Couple #1 starts taking Social Security at age 62 and receives $30,000 annual Social Security benefits.
Couple #2 spends from their IRA’s first to delay taking Social Security. At age 70, they start receiving Social Security benefits of $48,600 per year.

At age 70, the pretax income for each couple will be:
Couple #1 $40,000 from IRA’s plus $30,000 Social Security = $70,000
Couple #2 $21,400 from IRA’s plus $48,600 Social Security = $70,000
If you want to skip the final tax calculations, skip down to the heading “Final Tax Amount” to see the tax savings from spending your IRA first.

Calculation of Provisional Income
For the calculation of provisional income we will assume that they did not receive any tax exempt interest.
Couple #1 $40,000 from IRA’s plus $30,000/2 Social Security = $55,000 provisional income.
Couple #2 $21,400 from IRA’s plus $48,600/2 Social Security = $45,700 provisional income.
As you can see, by spending their IRA funds and delaying Social Security, couple #2 lowered their provisional income by $9,300.

Calculation of Taxable Social Security Income
How much does that save in taxes? The IRS has made this calculation complicated. You can access the form for this calculation on page 25 of the Instructions for Form 1040 from the IRS website.
Since these couples will be over the upper limit ($44,000) for provisional income, the amount they will pay on Social Security income is calculated by performing two calculations and then taking the lesser of the two amounts from the calculations.
Calculation #1 = 85% of Social Security
Calculation #2 = $6,000 %2B 85% times (provisional income – $44,000)

For couple #1
The first calculation is 85% times $30,000 Social Security = $25,500.
The second calculation is $6,000 plus 85% times ($55,000 less $44,000) = $15,350.
The lesser amount from the two calculations is $15,350.

For couple #2
The first calculation is 85% times $48,600 Social Security = $41,310.
The second calculation is $6,000 plus 85% times ($45,700 less $44,000) = $7,445.
The lesser amount from the two calculations is $7,445.

Final Tax Amount
Now let’s calculate the total taxable income for both couples.
Taxable income for couple #1 will be total IRA income ($40,000) plus the taxable Social Security income ($15, 350) = $55,350.
Taxable income for couple #2 will be total IRA income ($21,400) plus the taxable Social Security income ($7,445) = $28,845.

To calculate the tax each will pay, we will use the 15% tax rate.
Couple #1 will pay $8,303 and couple #2 will pay $4,327. Couple #2 will save $3,976 in taxes over couple #1.
By spending their IRA first, couple #2 will have $3,976 more each year to spend on their retirement. Multiply this over the years in your retirement and it will take you on a few nice trips or allow you some pleasures that you would otherwise not have been able to enjoy.

In summary, spending your IRA first can increase your Social Security benefits, lower your tax exposure from potential tax increases in the future, and lower the tax you must pay on your Social Security.

Disclaimer: The information in this article is general information. If you want to leave an estate to your children or if you are in poor health, concepts presented in this article may not apply to you. Seek professional advice from your accountant or a professional adviser.

Article by John Howe

401k Retirement Plan

A 401k is a type of employer-sponsored retirement plan. It is a way for employees to save for their retirement by having a certain percentage of their paycheck withheld by their employer and deposited into the company’s plan. Employers can choose to match the employee’s contributions and thereby share the profits of the company with their employees. The plan is usually operated through an investment firm.

For example, Acme Company’s 401k plan allows employees to contribute part of their paycheck into the plan. Acme will match incrementally up to 3% of the employees contribution. If the employee contributes 3%, Acme will contribute 2% to the employee’s account. If the employee contributes 4%, the company will contribute 2.5%, and if the employee contributes 5% or more, the company will contribute 3%. The employer’s contributions are called matching contributions.

As you can see, if an employer provides matching contributions, the employee can increase the amount of money he receives from his employer above and beyond his salary. For example, if Joe makes $30,000 in 2007 and contributes 5%, Acme will contribute an additional 3%. As a result, Joe will receive $30,000 plus $900 additional money from Acme’s matching contributions. Joe’s total compensation will be $30,900, not $30,000, simply because he participates in Acme’s plan.

How does a 401k work?

Your employer withholds a certain amount of your paycheck and deposits that money, along with any matching contributions, into your 401k account. The money in the plan is invested in various financial instruments, such as mutual funds. The money stays in the account until you reach a certain age when it is legal to withdraw the money, or until you meet any of the several exceptions to the age rule. Since the money will be in the account over a period of years, this causes the account to earn money through compounding, so your account grows not only through your regular contributions made from your paycheck but also by earning interest or dividends.

How do I make contributions to a 401k?

You make a contributions through your employer. If you decide to participate in the plan, you will determine what percentage of your paycheck that you want to be deposited in your account, and your employer will withhold that amount from each paycheck you receive. The employer then deposits the withheld money into your account, along with any matching contributions, so contributions are made to your account each pay period.

Are there any limitations to making a contribution to a 401k?

Yes, there are limitations. You are limited by IRS rules and also by whatever rules your employer implements in his plan.

IRS Contribution Limitations For 2007, the limit for contributions to defined contribution plans is the lesser of:

1. 100% of the participant’s compensation, or

2. $45,000.

Employer Limitations

When your employer sets up his plan, he can place limitations on contributions. The plan can be set up so that employees can only contribute up to a certain percentage of their paychecks. A common example is the limitation on matching contributions the employer will provide.

What is a company match?

A company match is when employers agree to contribute certain amounts to your 401k in addition to your own contributions. Employers may decide to make a contribution above and beyond what you decide to contribute. This is one version of what is commonly known as profit-sharing since the company gives you additional compensation toward your retirement. Because you are part of the company and your work helps contribute to any profit the company makes, employers use matching contributions as a way to reward employees for their input to the company’s bottom line. This can also provide an incentive for employees to work harder in order for the company to make more money.

If my employer goes out of business before I retire and receive distributions from my 401k, what happens?

401k plans are covered by the Employee Retirement Income Security Act of 1974, or ERISA. Generally, if an employer goes out of business or becomes bankrupt, the employer’s creditors receive the employer’s assets to settle debts. However, ERISA protects your plan money from those creditors. The creditors generally cannot get any money from a 401k plan to settle debts of a bankrupt employer.

When can I withdraw my money from a 401k?

You can withdraw your money at any time. However, if your withdrawal is an early distribution, you will have to pay an extra tax on the withdrawal.

What is an early distribution?

An early distribution is any money taken out of your 401k before reaching age 59 1/2. Early distributions are subject to a 10% tax penalty in addition to regular income taxes, so if you withdraw $5,000 when you are 45, you will have to pay $500 as a tax penalty. However, as discussed in the following question, there are some exceptions that allow you to withdraw money before age 59 1/2 without owing the 10% penalty.

Are there any other circumstances when I can withdraw my money before age 59 1/2?

Yes, there are some exceptions to the age rule. You will not owe the 10% tax on an early withdrawal if the withdrawal is: 1. Made to a beneficiary after your death. 2. Made because the employee has a qualifying disability. 3. Made as part of a series of substantially equal periodic payments. 4. Made after separation from service if the separation occurred during or after the year when the employee reached age 55. 5. Made to an alternate payee under a qualified domestic relations order (QDRO). 6. Made to an employee for medical care. 7. Timely made to reduce excess contributions under a 401k plan. 8. Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions). 9. Timely made to reduce excess elective deferrals. 10. Made because of an IRS levy on the plan. 11. Made a qualified reservist distribution.

How do you maintain a 401k?

You maintain your account by making contributions to it. You can only make contributions through your employer. The contributions are withheld from your paycheck, and any matching contributions from your employer are deposited into the plan by your employer. If you leave the company, you can choose to leave your 401k as it is, or roll it over into a Traditional IRA.

If I quit my job where I was participating in a 401k plan, what happens?

The money you contributed to the 401k is always yours, regardless of how long you have worked for the employer. Generally, an employer requires that you work a certain number of years before you are vested, which simply means that you are legally entitled to the employer’s matching contributions. Therefore, depending on your employer’s rules, you may or may not be able to keep the employer’s matching contributions.

There are several things that you can do with your account after leaving your job. One is to leave the 401k in your employer’s plan until you decide what to do with it. You can even leave it there until you reach age 59 1/2 and can begin receiving distributions. However, your former employer may charge you fees for maintaining your 401k for you. Check the plan agreement for details about your former company’s specific rules.

Another thing you can do is rollover your 401k into a Traditional IRA. Contributions to Traditional IRA’s receive the same type of tax deferral treatment as contributions to 401k’s, so you may be able to rollover your money into a Traditional IRA and not owe additional taxes.

What if I am laid off or fired?

Your options include any of the solutions discussed in the previous question. Despite being fired or laid off, the contributions that you made to your account are still your money, so you are legally entitled to all contributions that you made. However, depending on the rules of your plan, you may not be entitled to the employer matching contributions.

Can I start a 401k if I already have an IRA?

Yes, you absolutely can participate if you also have IRA’s, Traditional or Roth.

How does a 401k affect my federal income tax?

Contributions are considered “elective deferrals” of income, so you do not pay any federal income tax on them in the year you make the contribution. For example, John contributes $1,000 to his 401k in 2007, and his employer contributes $200. John’s salary for the year is $30,000. He will pay federal income taxes on $29,000 only, which is his salary minus his $1,000 contribution.

However, Uncle Sam will never let you get away completely tax-free. When you take distributions from your plan during retirement, you will pay federal income taxes on that money then. For example, if Susan is age 65 and receives a $10,000 distribution in 2007, she will owe taxes on the $10,000. However, when she contributed to the plan years ago, she did not have to pay any taxes on the money she contributed then.

Do I have to withdraw money at a certain age?

Yes, you must start withdrawing money by April 1 of the year after: 1. You reach age 70 1/2, or 2. You retire from the company maintaining the 401k plan.7

What happens to my 401k after I die?

You may designate beneficiaries who will inherit your account after your death.8

Why participate in a 401k? Why not just invest that money in mutual funds?

By participating, you receive tax benefits that you would not receive by investing your money in mutual funds on your own. The money you contribute is not subject to income tax. Therefore, you end up paying fewer taxes by participating in the plan than if you bought mutual funds on your own. For example, Joe works for ABC Company. He makes $30,000 and contributed $1,500 to his 401k. He will owe federal income taxes on $28,500 only, not on his full salary of $30,000. He gets to deduct the contributions from his income before calculating his taxes.

Another reason to participate is that in most plans, employers match a portion of your contributions, so it is as if your employer is giving you free money simply by participating! For example, Joe of ABC Company makes $30,000 in 2007 and contributes $1,500 of that salary to his 401k plan in 2007. ABC Company provides matching contributions of $1000, so Joe really makes $31,000 in 2007, not just his $30,000 base salary.

Article by Khaty Panambo

Roth IRA Rules

Have you read about this recently? The government has set up Roth IRA rules that allow you to save and earn money for retirement that won’t be taxed when you take it out. Does it sound too good to be true? Well, it isn’t. You can really save the best for last when you set up this type of savings account.

The definition of a Roth IRA, named for U.S. Congressman, William V. Roth, Jr., is a retirement savings account in which an individual is allowed to set aside a specified amount of their income, after taxes. Earnings grow tax free and can be withdrawn, tax-free, at age 59 1/2.

Allowable Contributions

In 2008, Roth IRA rules limit allowable contributions $5000. Making maximum contributions annually, while earning just a modest 8% interest, means that you could build a substantial, tax-free nest egg.

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

Allowable contributions must come from income that your earn from a job. If the income from that job is over $101,000, your maximum contribution will be lowered, from $5000, incrementally, according to your income amount.

The definition of a Roth IRA, named for U.S. Congressman, William V. Roth, Jr., is a retirement savings account in which an individual is allowed to set aside a specified amount of their income, after taxes. Earnings grow tax free and can be withdrawn, tax-free, at age 59 1/2.

Allowable Contributions

In 2008, Roth IRA rules limit allowable contributions $5000. Making maximum contributions annually, while earning just a modest 8% interest, means that you could build a substantial, tax-free nest egg.

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

Allowable contributions must come from income that your earn from a job. If the income from that job is over $101,000, your maximum contribution will be lowered, from $5000, incrementally, according to your income amount.

If you file a joint tax return, your combined income cap is $159,000. Above that amount and, again, your allowable contributions will be lowered accordingly.

If you are at a point in your career where your income is well below the maximum cap, but you expect to meet and exceed that cap in the next few years, you would still be well advised to take advantage of a Roth IRA. The earnings from contributions made even over a short period of time could add a substantial tax free bonus to other retirement savings.

Added Incentives

And speaking of bonuses, Roth IRA rules provide some added incentives for individuals holding these accounts. For example, you can withdraw your contributions (not your earnings*), any time, tax free. This may come in handy if you find yourself in financial dire straits. Ideally, though, this money really is for retirement and shouldn’t be touched, if possible.

If you’ve had a Roth IRA for at least five years, you can also withdraw up to $10,000 ($20,000 if you’re married), tax free to purchase a home. If you’ve had your account less than five years, you can still withdraw the maximum amount for a home, but you will have to pay taxes on it. However, there is no 10% early withdrawal penalty.

Roth IRA rules also allow you dip into your savings to help pay college expenses. You are allowed to withdraw contributions tax free, but if you take out earnings, they will be taxed accordingly, without the 10% penalty ­ provided that the funds are being used for college.

Allowable Investments

You may notice that the definition of a Roth IRA doesn’t cover investing your contributions so that you can grow your earnings. However, according to Roth IRA rules, you are allowed to invest in almost anything  stocks, bonds, CD, mutual funds and even real estate.

You can set up a self directed Roth IRA that will give you decision-making authority over investments. If you don’t care to be more involved beyond making contributions, your financial institution or investment counselor will invest your money for you. In both cases, the custodian of your account will be responsible for generating reports, regulation compliance, and other applicable paperwork.

If you follow Roth IRA rules, you can get your taxes out of the way, save and earn money and never have to give Uncle Sam another dime. That’s what I call, “saving the best for last!”

Article by Nicanor Castillo

401a Retirement Plans

What is a 401(a)?

A 401(a) is a type of retirement plan available through certain employers. Contributions of money into your plan are made through your employer and the employer makes most of the decisions about how the plan is set up. Contributions can be made by the employer, you the employee, or both.

What are the advantages of a 401(a)?

The advantages of having a 401(a) plan is that it effectively increases your after tax income since contributions are deducted before your income tax is calculated. Since most employers set up a system where contributions are automatically deducted out of your paycheck, the dollar cost averaging effect takes place. Dollar cost averaging spreads the cost of the investment over a long period of time which can provide protection from fluctuations in market prices; the opposite of dollar cost averaging would be to make one huge purchase of investment assets once. Dollar cost averaging allows investors to eventually build up a large amount of investment assets by incrementally buying them over a long period of time.

Also, if you ever change employers, your contributions are your property so you do not lose any of the money deducted from your paycheck if you change jobs. You also have the option of putting any 401(a) money into a 401(k), 403(b), 457, or Traditional IRA.

401(a)’s also provide tax advantages. Any earnings on your contributions are tax-free until you begin to make withdrawals when you retire. So if your 401(a) money is invested in mutual funds, you will not owe any income tax on the dividends earned until you make a withdrawal from your 401(a). Also, if your employer offers a 457(b) plan, you can participate in both at the same time.

Do I have to meet certain requirements to participate in a 401(a)?

There are usually participation requirements set up by your employer. Common examples include being a full-time employee, having worked for the company for a certain number of months, or having completed a certain number of hours of work for the company.

How will money be deposited in my 401(a) account?

The plan can be set up with employer-only contributions or matching contributions. The employer will decide how the plan will be set up. If there are matching contributions, a fixed amount will be deducted from each of your paychecks and deposited in the 401(a). If contributions are only made by the employer, then the employer will periodically deposit money into your 401(a) account.

You should receive account statements every so often detailing the balance and activity in your 401(a) account.

When can I withdraw my money from a 401(a)?

You can withdraw your money at any time. However, if your withdrawal is an early distribution, you will have to pay an extra tax on the withdrawal.

What is an early distribution?

An early distribution is any money taken out of your 401(a) before reaching age 59 1/2. Early distributions are subject to a 10% tax, so if you withdraw $5,000 from your 401(a) when you are 45, you will have to pay $500 in taxes. However, as discussed in the following question, there are some exceptions that allow you to withdraw money before age 59 1/2 without owing the 10% penalty.

Are there any other circumstances when I can withdraw my 401(a) money before age 59 1/2?

Yes, there are some exceptions to the age rule. You will not owe the 10% tax on an early withdrawal if the withdrawal is:

1. Made to a beneficiary after your death.
2. Made because the employee has a qualifying disability.
3. Made as part of a series of substantially equal periodic payments.
4. Made after separation from service if the separation occurred during or after the year when the employee reached age 55.
5. Made to an alternate payee under a qualified domestic relations order (QDRO).
6. Made to an employee for medical care.
7. Timely made to reduce excess contributions under a 401(a) plan.
8. Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
9. Timely made to reduce excess elective deferrals.
10. Made because of an IRS levy on the plan.
11. Made a qualified reservist distribution.

Are there any limitations to making a contribution to a 401(a)?

Yes, you are limited by IRS rules and by whatever rules your employer implements in his 401(a) plan.

IRS Contribution Limitations

There are many IRS rules dictating limitations on contributions to 401(a) plans. They can get fairly complicated and involve many calculations. Check with your plan administrator or financial advisor for more detailed information, but be aware that there are limitations to the amount of money you can contribute to a 401(a) each year.

Employer Limitations

When your employer sets up his 401(a) plan, he can place limitations on contributions. The plan can be set up so that employees can only contribute up to a certain percentage of their paychecks. An employer can decide to set up his plan in a variety of ways, so be sure to get clarification and explanation of your employer’s rules.

Can I start a 401(a) if I already have an IRA?

Yes, you absolutely can participate in a 401(a) if you also have IRA’s, Traditional or Roth.

How does a 401(a) affect my federal income tax?

401(a) contributions are considered “elective deferrals” of income, so you do not pay any federal income tax on them in the year you make the contribution. For example, John’s employer contributes $1,000 to his 401(a) in 2007. John’s salary for the year is $30,000. He will pay federal income taxes on $30,000 only, which is his salary without the employer contribution included.

However, you do not get away completely tax-free. When you take distributions from your 401(a) plan during retirement, you will pay federal income taxes on that money then. For example, if Susan is age 65 and receives a $10,000 distribution from her 401(a) in 2007, she will owe taxes on the $10,000. However, when she contributed to the plan years ago, she did not have to pay any taxes on the money she contributed then.

What happens to my 401(a) after I die?

You may designate beneficiaries who will inherit your 401(a) after your death.

Why participate in a 401(a)? Why not just invest that money in mutual funds?

By participating in a 401(a), you receive tax benefits that you would not receive by investing your money in mutual funds on your own. The money contributed to your 401(a) is not subject to income tax. Therefore, you end up paying fewer taxes by participating in a 401(a) than if you bought mutual funds on your own. Another reason is that it effectively increases your compensation from your employer. If your employer makes $1000 of contributions to your 401(a) in 2007 above and beyond your base salary, you effectively get an additional $1000 in compensation for which you do not owe federal income taxes.

This article has covered common questions investors typically have when learning about 401(a) plans. This article does not cover all aspects of the 401(a), but it is designed to give you an overview of what the plan is and how it works. For additional information or specific questions, contact your plan administrator or financial advisor.

403b Retirement Plan Facts

403 retirement plans are tax deferred retirement plans available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code (IRC).

I’ve 10 facts here on 403b which you should know.

Fact 1: The Workings Of 403b Plans

You set aside money for retirement on a pre-tax basis through a salary reduction agreement with your employer. You choose from among the vendors offered by your employer where you want to invest the money. The money grows tax free until you withdraw it at retirement.

Fact 2: Who Can Contribute To A 403b

If you’re an employee of tax-exempt organizations established under section 501(c)(3) of the IRC, you’re eligible to participate and start contributing. Teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians and ministers are contributors to the plan.

Fact 3: Why Contribute to a 403b

Your employer provides you with a pension upon your retirement. However, the pension plan may not provide an amount equal to your salary. A 403(b) plan can provide a healthy supplement to your pension.

Fact 4: How Much You Can contribute Annually

You can contribute the smaller of:
• The elective deferral limit of $15,500
• or Up to 100% of including compensation
• or If you’ve employer matches or other employer contributions, limits are $46,000 or 100% of compensation (whichever is lower). You’re still limited to the employee elective deferral limit ($15,500). Hence, your employer can add another $30,500 to your account
• If you’re 50 or older at any time during the year, you can contribute an additional $5,000

Fact 5: Lower Taxes

You make 403b contributions on a pre-tax basis which can greatly reduce your tax bill. The tax savings grow bigger as your contributions increase.

Fact 6: More Tax Savings

All dividends, interests and capital gains earned in a 403b account are on a tax-deferred basis. This means your earnings will grow tax-free until time you withdraw them.

Fact 7: Part Time Employees Eligible To Contribute to 403b Retirement Plans

Your employer must extend the 403b plan to all the employees.
However, certain employees may be excluded, such as:
• Employees who contribute $200 or less annually
• Employees who are participants in an eligible deferred compensation plan (457 or 401k) or participants in another TSA (tax sheltered annuity)
• Non-resident aliens
• Students and employees who work less than 20 hours per week

Fact 8: 403b Plan Does Not Reduce Social Security Benefits
Your contributions to a 403b reduce taxable compensation for federal (and in most instances, state) income tax purposes only. These contributions don’t reduce wages for the purpose of determining Social Security benefits.

Fact 9: Special Tax Credit For Low-Income Savers

Eligible savers will receive a tax credit of up to 50% or up to $2,000 in contributions to an IRA, 403b, 457, SIMPLE, 401k plan and other tax-favored plans. The full credit is available to joint filers whose adjusted gross income (AGI) is less than $53,000, and for singles whose AGI is under $26,500.

Fact 10: A 403b Can Be Rolled Into An IRA

This occurs when you change job; retire; become disabled or die. OK, you might think 403b retirement plans are more or less similar to 401k plans. But there’s a big difference there – your eligibility. If you’re an employee in public schools and certain tax-exempt organizations (as determined by Section 501(c)(3) of the IRC), you’re eligible for 403b. The 401k, on the other hand, covers private-sector employees Due to her strong yearning to retire early in life,

Article by Cecelia Yap

457 Retirement Plan

A 457 retirement plan offers employees of state governments, subdivisions of state governments or certain eligible key employees of non-profit organizations to save for their retirement now and pay taxes later by contributing a portion of their salaries to the plan.

I’m gonna touch on 6 things about the plan which I think is pertinent for you to know if you’re participating in this plan.

1. How Much You Can contribute on a Tax-Deferred Basis

You may contribute the lesser of $15,500 or 100% of compensation. If you’re eligible for catch-up contribution, then you can contribute an additional $5,000 to make a total of $20,500.

2. How Are The Contributions Invested

The money you contribute is invested at your direction in one or more of a variety of investment options offered by the plan. Many 457 plans offer both fixed and variable investment options.

Many 457 plans offer both fixed and variable investment options.

The fixed options which are through bank and insurance company products guarantee principal and interest.

The variable options which are through insurance company products, bank products or mutual funds provide “variable” returns, which are not guaranteed.

Your employer determines the investment options available to you and the options may change from time to time.

3. When You Can Withdraw The Money You Have In Your 457 Retirement Plan

You can withdraw the money upon:

• Your retirement
• Your encountering of emergency
• Reaching the age of 701/2
• Termination of service
• Your death

Withdrawals are subject to ordinary income taxes.

4. When You Are Required To Withdraw Your Money

You begin to receive benefit payments from your account the later of April 1 of the calendar year following the calendar year in which you:

** Reach the age 701/2, or
• Separate from service with your employer who sponsors your plan

If you fail to begin withdrawing as is required, it would subject you to IRS penalties equal to 50% of the amount that should have been withdrawn but wasn’t.

5. If You Leave Your Current Employer

You may:

• Leave your money invested in the 457 plan until your required distribution date
• Rollover your plan into your new employer’s eligible qualified plan (401k, 403(b), or 457),if your new employer’s plan allows for this rollover
• Withdraw your money, subject to withdrawal charges and/or fees. Also distributions are taxable and penalties may apply
• Under certain circumstances you may roll your vested account balance into an IRA (individual retirement account) subject to withdrawal charges and/or fees.

6. If You Die

Benefits payable upon your death, if any, depend on the allocation of your investment options.

Group fixed and variable deferred annuity

It depends on your age at death and whether or not your annuity payments have started. Usually, at your death, the money invested will be paid to your designated beneficiary according to the death benefit provisions in the annuity contract.

Mutual funds

The account value as of the date of death will be paid to your designated beneficiary. All death benefits will be paid in accordance with the payout method you have selected. If you die before selecting a payout method, your beneficiary will be allowed to select one for the distribution of your remaining account value. Due to her strong yearning to retire early in life,

Article by Cecelia Yap

Post Retirement Planning and Investment Risk

The conventional advice to retirees is that they should invest in low-risk financial instruments during retirement. Alternatively, the advice of some advisors is that “safe” investments would simply expose your retirement fund to other risks. There is merit in both positions, which is why portfolio diversification can be a great strategy at any life stage. Ultimately, retirees must invest so that they can sleep well at night and protect the real value of their investment. Retirees should base their investment decisions on the following:

1) Risk tolerance- Some people are gamblers, while others are ultra-conservative. Your risk tolerance is primarily influenced by your personality. The main point about investing and risk is that you should be comfortable with the level of risk that you’re taking. No one else can tell you what your comfort-level is. You certainly do not want to invest exclusively in growth options that leave you perpetually worried.

2) Depth of reserves- The level of risk that you can withstand would be dependent on the depth of your reserves as well. Someone who invests 40% of his retirement fund in growth options would find that the nominal amount exposed to loss would be significant. 40% of a $200,000 retirement fund is a significantly higher risk than the same percentage of a $2,000,000.00 retirement fund in terms of the actual dollar value.

3) Inflation risk- Although you’re seeking to provide security for your money, you may inadvertently cause a real loss or substantially lower real returns in the long-run. The good news is that you do not have to put your retirement fund at risk to beat inflation. Use the Consumer Price Index as a guide and seek high-yield CDs or bonds that provide rates of return that outstrip the inflation rate.

4) Understand the risk-return trade-off- The higher the risk associated with a financial instrument, the greater the potential return is. This trade-off is a primary reason that diversification should take place. This is because neither situation is optimal for the retiree. Low risk-low return increases inflation risk while high risk-high return increases the risk of loss. Conservative investing does not necessarily imply investing exclusively in low-risk funds. It suggests that the majority of your investment should be split between cash and income options and a relatively lower percentage assigned to growth instruments.

5) Understand averages- In choosing mutual funds; beware of making selections based on averages alone. Apart from investment fees and charges being a significant aspect of most mutual funds, averages can be misleading. One portfolio may have a better average than another. However if the higher-average fund is volatile, reaching extreme highs and lows, this could be riskier than if you have a moderate-return fund that does not tend to either extremities.

Some retirees leave the bulk of their retirement funds in savings accounts, while their higher-order investments are money-market funds. In economies where the inflation rate is medium to high, this is likely to do nothing for the preservation of your savings. This would mean that your fund would dwindle faster, especially if you didn’t optimise your choice. Even if you are making a low-risk investment, it is incumbent on you to choose the best-performing fixed deposit or money-market fund.

The argument that high-risk growth options are not for retirees is a half-truth. The real truth is that the non-working retiree should not invest a significant portion of his savings aggressively. Given that retirees are living longer, they are more exposed to the risk of outliving their savings and inflation risk. Once portfolios are diversified according to risk tolerance, financial reserves and needs, then the retiree would be in a better position.

Article by Darrell Victor

Planning for Your Retirement

Most of us envision retirement as a time to relax, spend time with loved ones, travel or start a new hobby. But it’s difficult to reap the rewards of our hard-earned years of work without some careful financial and health benefits planning. A new national survey of pre-retirees and retirees reveals that Americans are not spending enough time planning for their retirement.

Plan for Your Health, a public education program from Aetna and the Financial Planning Association, sponsored a survey of more than 1,000 Americans ages 45 to 75 with health insurance to find out about their attitudes and habits regarding retirement planning. You may be able to relate to some of the findings.

• Of pre-retirees surveyed, nearly 20 percent have spent “no time” in the past year actively planning for retirement, and more than 30 percent don’t know what to anticipate for health care needs.

• Sixty-six percent of pre-retirees who have spent time planning for their retirement, spend the same amount or more time on home improvement than on retirement planning. And 60 percent spend the same amount or more time planning for their children’s college education.

• What’s even more amazing, 31 percent of pre-retirees would rather clean their bathroom or pay bills than plan for retirement.

It’s clear that pre-retirees have a lot of other financial priorities; however, it’s important to start thinking about planning for retirement needs now because planning ahead protects your family’s resources from what can be considerable health care costs.

One of the best steps you can take to protect and secure your financial future is to plan for your health and well-being. While both pre-retirees and retirees agree that “good health” is most important to them in retirement, nearly 40 percent have spent less than one hour in the past year planning for health benefits in retirement.

Although most pre-retirees focus on the financial aspects of retirement planning, researching and understanding health benefits options seem to be left out of the equation.

• More than one-third of pre-retirees are most focused on contributing to a 401(k), 403(b) or IRA.

• Although 74 percent of respondents said they factored Social Security and Medicare benefits in their retirement plan, 77 percent are concerned about the financial issues facing these programs.

But, planning for retirement is not just about finances; it involves everything from reevaluating your daily routine and budget, to your health care options — including Health Savings Accounts (HSAs), long term care and life insurance.

• Eighty percent or more of pre-retirees and retirees expect to pay for prescription drugs and doctor’s visits in retirement. Twenty-nine percent even anticipate costs related to alternative medicine and five percent plan for cosmetic surgery, a snapshot of consumers’ health care preferences today.

• However, 52 percent of those surveyed expect to spend less than $300 a month on out-of-pocket costs and health care-related expenses during retirement — less than half of the $640 a month the average retiree actually spends.

It’s obvious that many Americans have a lot to think about when it comes to planning for retirement, which may be why 63 percent say that “people they know” are very or somewhat confused about health benefits. But, it doesn’t have to be this way.

Now is the time to start planning and learning all about your health benefits and financial needs for retirement. Planning now will serve you well in the future. After all, your goal is for a long and happy, healthy retirement — exactly what you’ve always dreamed of.

Article courtesy of ARA Content

Next Page »