IRA / INDIVIDUAL RETIREMENT ACCOUNT. What is an IRA? And what does it matter?
Retirement Planning: A Helpful Resource Guide...
Understanding Different Types of Retirement Accounts At: www.
You can choose from three different types of retirement accounts:
- The 401(k) and traditional IRA. These are tax-deferred accounts.
- The Roth IRA and the Roth 401(k) plan. These are tax-free accounts.
- Brokerage investment or savings bank account. All earnings on your investments are taxable.
The most common ways retirement accounts are opened:
- Through your employer
- Through yourself, if you are self-employed
- Through financial institution on your own
Employer-Sponsored Retirement Account – 401(k)
Account
401k plans are retirement plans offered by employers. And a 401k account is tied to your employer because the employer sponsors the plan. A 401k is just the name of your retirement savings account where you save money for retirement.
Withdrawals
You will start paying taxes on money invested only after you retire. If you withdraw money before the age 59 ½ you will pay a 10 percent penalty fee and taxes on your withdrawal. At age 72 you will be forced to start taking money out of tax-deferred accounts because IRS is eager for you to pay taxes on the money. If you do not take your RMD (Required Minimum Distributions) on time, you will face a 50 percent penalty fee.
Self-Employed Retirement Account – Solo 401(k)
Solo 401(k) or Self-Employed 401(k) is an individual retirement plan for someone who is self-employed and does not have any full-time employees besides a family member. Solo 401(k) rules are similar to a regular 401(k), but a bit complex to set up. You can open an account with any online brokers. But you will need an Employer Identification Number (EIN), an account application, and the company rules for your 401(k).
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Traditional IRA Retirement Account
Account
The traditional IRA, which stands for Individual Retirement Account, works the same as a regular 401(k), but no employer is involved. You can open an IRA on your own with any online brokers. Online brokerages such as Fidelity, Schwab, and Vanguard are good choices. And you can have both 401(k) and IRA accounts.
Withdrawals
If you take money out of your IRA before you reach age 59½, you will face a 10 percent penalty fee (the same as with a regular 401(k). In addition to that, you will have to pay federal and state income taxes you owe on the withdrawal.
There are a few exceptions to this rule. You can avoid the penalty if you withdraw the money for the following reasons:
- Buying a home for the first time
- Disability
- Qualified education expenses
- Health insurance (if you are unemployed)
- Medical expenses that were not reimbursed
At age 72 you will be forced to start making withdrawals from your traditional IRA (the same as 401(k) rules).
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Individual Retirement Accounts (IRAs)
An IRA is a tax-favored investment account. You can use the account to invest in stocks, bonds, mutual funds, ETFs, and other types of investments after you place money into it, and you make the investment decisions yourself unless you want to hire someone else to do so for you. You might consider investing in a traditional IRA if your employer doesn't offer a retirement plan or if you've maxed out your 401(k) contributions for the year
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401(k) Plans
A 401(k) plan is a workplace retirement account that's offered as an employee benefit. This account allows you to contribute a portion of your pre-tax paycheck to tax-deferred investments. This reduces the amount of income you must pay taxes on that year
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Roth IRAs
Unlike a traditional IRA, Roth IRA contributions are made with after-tax dollars. But any money generated within the Roth is never taxed again.
You can withdraw contributions you've made to a Roth IRA before retirement age without penalty, provided five years have passed since your first contribution. You're not currently required to begin taking withdrawals at age 72, as you are with traditional IRAs, 401(k)s, and other retirements savings plans.9
Putting money in a Roth is a great place to invest extra cash if you're just starting out and you think your income will grow. You can even contribute to both an IRA and a Roth IRA, but your total contributions to both plans can't exceed the $6,000 contribution limit for the year
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Roth 401(k)
A Roth 401(k) combines features of the Roth IRA and a 401(k). It's a type of account offered through employers, introduced in 2006. As with a Roth IRA, contributions come from your after-tax paycheck rather than your pre-tax salary. Contributions and earnings in a Roth are never taxed again if you remain in the plan for at least five years.
The best part about a Roth 401(k) is that there is no income limit as with a Roth IRA. The annual contributions are the same as a traditional 401(k), too—just with after-tax dollars. Withdrawals are the same as Roth IRAs as well, but the distribution rules match those of a traditional 401(k)
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SIMPLE IRA
The Savings Incentive Match for Employees (SIMPLE) IRA is a retirement plan that small businesses with up to 100 employees can offer. It works very much like a 401(k).11
Contributions are made with pretax paycheck withdrawals, and the money grows tax-deferred until retirement.
Early distributions can result in a hefty penalty, however. Unless you qualify for an exception, you’ll have to pay an additional 10% tax on the amount you withdraw from your SIMPLE IRA (similar to Traditional IRAs, 401(k) plans, etc.). If you make the withdrawal within 2 years from when you first participated in the SIMPLE IRA plan, this additional tax increases to 25%.12 You can't borrow from a SIMPLE IRA, either, the way you can from a 401(k)
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SEP IRA
A Simplified Employee Pension (SEP) IRA allows you to contribute a portion of your income to your own retirement account if you're self-employed and have no employees. You can fully deduct these contributions from your taxable income.
The maximum annual contribution limits are higher than most other tax-favored retirement accounts: $58,000 or 25% of income
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Retirement Planning: A Helpful Resource...
A secure retirement is every worker's dream, but successful retirement planning is what makes that dream a reality.
There are many tools and resources to help make the process a lot simpler and less daunting.
For instance, the U.S. Department of Labor, Employee Benefits Security Administration (EBSA) has a great online publication complete with interactive worksheets to help you with the process of retirement planning.
For many Americans, retiring in this century is a mystery. Earlier generations of workers could rely on employer-provided pensions, but now many workers will need to rely on their own work-related and personal savings plus Social Security benefts. These savings have to last longer because Americans are living longer, often into their eighties and nineties.
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Quit Worrying, Start Planning Remember you’re facing a retirement that’s probably going to be longer than your parents’ and will involve more uncertainties.
This new kind of retirement means there are many American workers worrying about, instead of planning for, the future. You can choose to stop worrying and start fguring.
Not only will you come up with facts to work with, the chances are good you might change the way you save.
The 2011 Employee Beneft Research Institute survey found that 44 percent of people who tried to fgure out their fnancial futures ended up changing their retirement savings plans
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Be realistic about how much of your home equity might be available for retirement. Remember that you will always need housing, and that condo fees, real estate taxes, maintenance and repairs, and rent tend to go up.
Other assets could be valuable collections or the cash value of life insurance. Keep in mind that the actual value of items like houses, boats, and collections can be determined only when real buyers make real offers.
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Timeline For Retirement: Timeline For Retirement: AT AGE 50 Begin making catch-up contributions, an extra amount that those over 50 can add, to 401(k) and other retirement accounts.
AT 59 1/2 No more tax penalties on early withdrawals from retirement accounts, but leaving money in means more time for it to grow.
AT 62 The minimum age to receive Social Security benefts, but delaying means a bigger monthly beneft. AT 65 Eligible for Medicare.
AT 67 Eligible for full Social Security benefts if born after 1959 (slightly earlier if born between 1955 and 1959). AT 70 1/2 Start taking minimum withdrawals from most retirement accounts by this age; otherwise, you may be charged heavy tax penalties in the future.
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If you rolled over accounts from former jobs into an IRA, then read your statement or call the fnancial institution holding this account. In addition, get statements from all your bank or mutual fund IRA accounts,
“Keogh” retirement savings, Simplifed Employee Pension-IRAs (SEP-IRAs), and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) plans. Personal savings and investments are next as possible retirement resources.
They could be in a savings or checking account at a bank or credit union or in a brokerage account. The assets in these accounts may include cash, U.S. savings bonds, certifcates of deposit, stock and bond mutual funds, and individual stocks and bonds. To get a dollar amount for your home equity, subtract the current mortgage balance from the current market value of your house.
Also subtract the amount you owe on home equity loans or lines of credit (enter it as a negative amount on the worksheet). The bank holding the mortgage can provide the amount of your remaining mortgage balance.
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How to Pass Down A Money Legacy
In order to pass on generational wealth appropriately, you’ll need to be prepared in a few other ways too. The last thing you want is your family fighting over money and assets, which happens all too often.
The best way to avoid and hopefully not have family issues, is by being legally prepared ahead of time. Here are some things to consider.
Will
Your will is basically a set of instructions on what is to be done with your wealth once you pass on. Your will should be very specific so there is no confusion as to who gets what — otherwise there could be some family fights that are taken to court due to unclear wills.
Estate plan
Your estate plan is the accumulation of all your assets, where they are stored and how to access them. If you have a large and complex estate, consulting an expert on how best to manage and pass on your wealth will make the entire process smoother.
Trust
A trust is a financial instrument that is specially designed to pass on wealth in a specific way. You can add cash, real estate and other stocks into your trust and set instructions as to how they should be used.
For example, you can create a trust of stock market investments and instruct it to be only used for education.
On your trust you’ll need to add beneficiaries: the people who will be managing and using your wealth. Once you pass away, the trust is simply passed onto the beneficiaries without allowing room for confusion.
Custodial accounts
Custodial accounts are investment accounts that you manage for your child which they will fully own once they reach a specific age (usually 18 or 21).
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