Planning for Retirement eBook

LifeFocus.com T. Young info@lifefocus.com www.LifeFocus.com

Planning for Retirement

March 28, 2010

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Table of Contents Introduction to Retirement Planning ..................................................................................................................11 What is retirement planning? ................................................................................................................... 11 How can you determine your retirement income needs? .........................................................................11 How do you save for retirement? ............................................................................................................. 11 What should you know about distributions from IRAs and other retirement plans? .................................12 What if you are an executive or business owner? ....................................................................................12 How do Social Security and other government benefits programs impact retirement planning? .............12 Do government employees have special retirement concerns? .............................................................. 13 Determining Your Retirement Income Needs ................................................................................................... 14 What is it? ................................................................................................................................................ 14 Preretirement ........................................................................................................................................... 14 The transition into retirement ................................................................................................................... 14 Retirement ................................................................................................................................................14 Estimating Your Social Security Benefits .......................................................................................................... 15 What is estimating your Social Security benefits? ................................................................................... 15 Obtaining a benefits estimate ...................................................................................................................15 Understanding how your benefit amount is calculated .............................................................................16 How to calculate your PIA using the wage-indexing method ................................................................... 16 Using your PIA to determine your benefit amount ................................................................................... 18 Factors that can increase or decrease your benefit ................................................................................. 19 Saving for Your Retirement ...............................................................................................................................20 Major considerations ................................................................................................................................ 20 Take full advantage of employer-sponsored retirement plans ................................................................. 20 Individual retirement accounts (IRAs) ...................................................................................................... 21 Choosing investments within your retirement plan ...................................................................................21 Evaluate nonqualified investment programs ............................................................................................ 22 Choose the right strategy to save for your retirement .............................................................................. 22

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Retirement Plans: The Employee Perspective ..................................................................................................24 What is the employee perspective on employer-sponsored retirement plans? ........................................24 How are employer-sponsored retirement plans categorized? ..................................................................24 Why should an employee participate in a qualified employer-sponsored retirement plan? ..................... 24 How can an employee optimize his or her retirement benefits? .............................................................. 25 Should you borrow money from your retirement plan? ............................................................................ 25 What are some of the more popular employer-sponsored retirement plans, and how do they work? ..... 25 IRAs .................................................................................................................................................................. 29 What is an individual retirement account (IRA)? ...................................................................................... 29 Overview of IRA types ..............................................................................................................................29 Rollovers and transfers ............................................................................................................................ 30 Converting or rolling over funds from traditional IRAs to Roth IRAs ........................................................ 31 Premature distribution tax ........................................................................................................................ 31 Required minimum distributions ...............................................................................................................31 The importance of beneficiary choice ...................................................................................................... 31 Investment choices appropriate for IRAs ................................................................................................. 31 Choosing the right type of IRA ................................................................................................................. 32 Annuities ........................................................................................................................................................... 33 What is an annuity? ..................................................................................................................................33 What are some of the common uses of annuities? .................................................................................. 34 How do annuities differ from other retirement plans? .............................................................................. 35 What are the advantages to annuities? ....................................................................................................35 What are the tradeoffs to an annuity? ...................................................................................................... 36 Why contribute to qualified retirement plans first? ................................................................................... 37 Why shop around for annuities? .............................................................................................................. 37 Saving for College and Retirement ................................................................................................................... 38 What is it? ................................................................................................................................................ 38 First, determine your monetary needs .................................................................................................... 38 You've come up short: what are your options? ........................................................................................ 38

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How do you decide what strategy is best for you? ...................................................................................40 Can retirement accounts be used to save for college? ............................................................................ 41 Distributions from Traditional IRAs: Prior to Age 59½ .......................................................................................42 In general ................................................................................................................................................. 42 Example showing the effect of taxes and penalties ................................................................................. 42 Exceptions to the premature distribution tax ............................................................................................ 43 How do you pay the premature distribution tax? ......................................................................................43 Should you take distributions from your traditional IRA before age 59½? ............................................... 44 IRA rollovers .............................................................................................................................................44 Converting or rolling over traditional IRAs to Roth IRAs .......................................................................... 45 Beneficiary Designations for Traditional IRAs and Retirement Plans ............................................................... 46 What is it? ................................................................................................................................................ 46 The law may limit your choices ................................................................................................................ 46 Your choice of beneficiary usually will not affect required minimum distributions during your lifetime .... 47 Your choice of beneficiary will affect required distributions after your death ........................................... 47 Other considerations when choosing beneficiaries ..................................................................................48 Designated beneficiaries vs. named beneficiaries ................................................................................... 48 Primary and secondary beneficiaries ....................................................................................................... 49 Having multiple beneficiaries ................................................................................................................... 49 When do you have to choose your beneficiaries? ................................................................................... 49 Paying death taxes on IRA and plan benefits .......................................................................................... 50 Your options when choosing your beneficiaries .......................................................................................50 Considering an Offer to Retire Early: Should You Take It? ...............................................................................51 What is it? ................................................................................................................................................ 51 Typical elements of an early retirement offer ........................................................................................... 51 Evaluating an early retirement offer ......................................................................................................... 52 Consequences of saying no to an offer ....................................................................................................52 Consequences of saying yes to an offer .................................................................................................. 53 Career counseling .................................................................................................................................... 54

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Retirement planning issues ......................................................................................................................54 Financial concerns ................................................................................................................................... 55 Traditional IRA: How Much Can You Contribute and Deduct in 2010? .............................................................57 Traditional IRA: How Much Can You Contribute and Deduct in 2009? .............................................................59 Roth IRA: How Much Can You Contribute in 2010? ......................................................................................... 61 Roth IRA: How Much Can You Contribute in 2009? ......................................................................................... 62 Investing for Retirement .................................................................................................................................... 63 Comparison of Traditional IRAs and Roth IRAs ................................................................................................64 Can You Contribute to an IRA in 2010? ............................................................................................................65 Can You Contribute to an IRA in 2009? ............................................................................................................66 Deductible Contribution Phaseout Limits for Traditional IRAs .......................................................................... 67 Converting Funds from a Traditional IRA to a Roth IRA: Factors to Consider ..................................................69 401(k) Plans ...................................................................................................................................................... 72 Retirement Options for Executives ....................................................................................................................73 Annuities ........................................................................................................................................................... 74 Sources of Retirement Income: Filling the Social Security Gap ........................................................................75 Saving For Your Retirement ..............................................................................................................................76 How a Fixed Deferred Annuity Works ............................................................................................................... 77 How a Variable Annuity Works ..........................................................................................................................79 Retirement Planning: The Basics ......................................................................................................................81 Determine your retirement income needs ................................................................................................ 81 Calculate the gap ..................................................................................................................................... 81 Figure out how much you'll need to save .................................................................................................81 Build your retirement fund: Save, save, save ...........................................................................................82 Understand your investment options ........................................................................................................82 Use the right savings tools ....................................................................................................................... 82 Estimating Your Retirement Income Needs ...................................................................................................... 83 Use your current income as a starting point .............................................................................................83 Project your retirement expenses ............................................................................................................ 83

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Decide when you'll retire .......................................................................................................................... 84 Estimate your life expectancy .................................................................................................................. 84 Identify your sources of retirement income .............................................................................................. 84 Make up any income shortfall .................................................................................................................. 84 Taking Advantage of Employer-Sponsored Retirement Plans ..........................................................................86 Understand your employer-sponsored plan ............................................................................................. 86 Contribute as much as possible ............................................................................................................... 86 Capture the full employer match .............................................................................................................. 87 Evaluate your investment choices carefully ............................................................................................. 87 Know your options when you leave your employer ..................................................................................87 Borrowing or Withdrawing Money from Your 401(k) Plan ................................................................................. 89 Plan loans ................................................................................................................................................ 89 How much can you borrow? .....................................................................................................................89 What are the requirements for repaying the loan? ...................................................................................89 What are the advantages of borrowing money from your 401(k)? ........................................................... 89 What are the disadvantages of borrowing money from your 401(k)? ...................................................... 89 Hardship withdrawals ............................................................................................................................... 90 How much can you withdraw? ................................................................................................................. 90 What are the advantages of withdrawing money from your 401(k) in cases of hardship? .......................90 What are the disadvantages of withdrawing money from your 401(k) in cases of hardship? .................. 90 What else do I need to know? ..................................................................................................................91 Deciding What to Do with Your 401(k) Plan When You Change Jobs ..............................................................92 Take the money and run .......................................................................................................................... 92 Leave the funds where they are ...............................................................................................................92 Transfer the funds directly to your new employer's retirement plan or to an IRA (a direct rollover) ........ 93 Have the distribution check made out to you, then deposit the funds in your new employer's retirement plan or in an IRA (an indirect rollover) ......................................................................................................93 Which option is appropriate? ....................................................................................................................93 Understanding IRAs .......................................................................................................................................... 95 What types of IRAs are available? ........................................................................................................... 95

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Learn the rules for traditional IRAs ...........................................................................................................95 Learn the rules for Roth IRAs ...................................................................................................................96 Choose the right IRA for you ....................................................................................................................97 Know your options for transferring your funds ......................................................................................... 97 Annuities and Retirement Planning ...................................................................................................................98 Get the lay of the land .............................................................................................................................. 98 Understand your payout options .............................................................................................................. 98 Consider the pros and cons ..................................................................................................................... 98 Choose the right type of annuity .............................................................................................................. 99 Shop around ............................................................................................................................................ 100 Choosing a Beneficiary for Your IRA or 401(k) ................................................................................................. 101 Paying income tax on most retirement distributions .................................................................................101 Naming or changing beneficiaries ............................................................................................................101 Designating primary and secondary beneficiaries ................................................................................... 101 Having multiple beneficiaries ................................................................................................................... 101 Avoiding gaps or naming your estate as a beneficiary .............................................................................102 Naming your spouse as a beneficiary ...................................................................................................... 102 Naming other individuals as beneficiaries ................................................................................................102 Naming a trust as a beneficiary ................................................................................................................103 Naming a charity as a beneficiary ............................................................................................................ 103 Saving for Retirement and a Child's Education at the Same Time ................................................................... 104 Know what your financial needs are ........................................................................................................ 104 Figure out what you can afford to put aside each month ......................................................................... 104 Retirement takes priority .......................................................................................................................... 104 If possible, save for your retirement and your child's college at the same time ....................................... 105 Help! I can't meet both goals ....................................................................................................................105 Can retirement accounts be used to save for college? ............................................................................ 106 Investing for Major Financial Goals ...................................................................................................................107 How do you set goals? .............................................................................................................................107

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Looking forward to retirement .................................................................................................................. 107 Facing the truth about college savings .....................................................................................................108 Investing for something big ...................................................................................................................... 108 Understanding Defined Benefit Plans ............................................................................................................... 109 What are defined benefit plans? .............................................................................................................. 109 How do defined benefit plans work? ........................................................................................................ 109 How are retirement benefits calculated? .................................................................................................109 How will retirement benefits be paid? ...................................................................................................... 109 What are some advantages offered by defined benefit plans? ................................................................ 110 How do defined benefit plans differ from defined contribution plans? ......................................................110 What are cash balance plans? .................................................................................................................110 What you should do now .........................................................................................................................110 Understanding Social Security .......................................................................................................................... 112 How does Social Security work? ..............................................................................................................112 Social Security eligibility ...........................................................................................................................112 Your retirement benefits ...........................................................................................................................112 Disability benefits ..................................................................................................................................... 113 Family benefits ......................................................................................................................................... 113 Survivor's benefits ....................................................................................................................................113 Applying for Social Security benefits ........................................................................................................113 Social Security Retirement Benefits ..................................................................................................................115 How do you qualify for retirement benefits? .............................................................................................115 How much will your retirement benefit be? .............................................................................................. 115 Retiring at full retirement age ................................................................................................................... 115 Retiring early will reduce your benefit ...................................................................................................... 116 Delaying retirement will increase your benefit ..........................................................................................116 Working may affect your retirement benefit ............................................................................................. 116 Retirement benefits for qualified family members .................................................................................... 116 How do you sign up for Social Security? ..................................................................................................117

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Tax-Deferred Annuities: Are They Right for You? .............................................................................................118 Five questions to consider ....................................................................................................................... 118 Annuity Basics .................................................................................................................................................. 119 Four parties to an annuity contract ...........................................................................................................119 Two distinct phases to an annuity ............................................................................................................ 119 When is an annuity appropriate? ............................................................................................................. 120 Shopping for an Annuity ....................................................................................................................................121 Financial stability ......................................................................................................................................121 Get the best performer ............................................................................................................................. 121 Compare fees ...........................................................................................................................................121 Watch out for surrender charges ..............................................................................................................121 Do your homework ................................................................................................................................... 121 Life Insurance at Various Life Stages ............................................................................................................... 123 Footloose and fancy-free ......................................................................................................................... 123 Going to the chapel .................................................................................................................................. 123 Your growing family ..................................................................................................................................123 Moving up the ladder ................................................................................................................................124 Single again ............................................................................................................................................. 124 Your retirement years ...............................................................................................................................124 Cash Value Life Insurance ................................................................................................................................ 125 Who should consider cash value life insurance? ..................................................................................... 125 Advantages of cash value life insurance ..................................................................................................125 Disadvantages of cash value life insurance ............................................................................................. 125 How Does Cash Value in a Life Insurance Policy Really Work? .......................................................................127 What is cash value? ................................................................................................................................. 127 Cash value, by any other name... ............................................................................................................ 127 How cash value grows ............................................................................................................................. 127 The amount of your premium that goes toward cash value decreases over time ....................................127 The role of cash value ..............................................................................................................................128

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An example .............................................................................................................................................. 128 How can we possibly save for retirement and our child's college education at the same time? .......................129 How late is too late to start saving for retirement? ............................................................................................ 130 Can I set up a traditional IRA? .......................................................................................................................... 131 How aggressive should I be when I invest for retirement? ................................................................................132 What are the rules for IRA contributions? ......................................................................................................... 133 Can I contribute to a Roth IRA? ........................................................................................................................ 134 It's January, and I forgot to contribute to my IRA. Is it too late? ........................................................................135 Should I contribute to my 401(k) plan at work? .................................................................................................136 How can I plan for retirement if my employer doesn't offer retirement benefits? .............................................. 137 I think it's time to start planning for retirement. Where do I begin? ................................................................... 138 What does the term "qualified plan" mean? ...................................................................................................... 139 Can I roll a retirement plan distribution into an IRA? .........................................................................................140 How much money should I save for retirement? ...............................................................................................141 Should I invest in a Roth IRA or a traditional IRA? ........................................................................................... 142 How should I structure my retirement portfolio? ................................................................................................143 What are my options if I inherit an IRA or benefit from an employer-sponsored plan? .....................................144 Can I still have a traditional IRA if I contribute to my 401(k) plan at work? ....................................................... 145 What is vesting? ................................................................................................................................................146 My company has a profit-sharing plan. How do these plans work? .................................................................. 147 I teach at a school that offers a 403(b) plan. Is this plan a good way to save for retirement? .......................... 148 Does the federal government insure pension benefits? ....................................................................................149 What are catch-up contributions? ..................................................................................................................... 150

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Introduction to Retirement Planning What is retirement planning?

Retirement planning involves an analysis of the various choices you can make today to help provide for your financial future. To make appropriate choices, you need to predict--as well as you can--your future economic circumstances. You'll also need to establish your post-retirement goals. When you've determined how much of an income stream you'll probably require in the future, you'll be in a position to make wise choices now about income, saving, investments, and employer-sponsored or other retirement plans.

Of course, you need to tailor your retirement planning to your own unique circumstances--planning methods may be different for employees and executives than for business owners. And no matter who you are, you'll probably want to gain some familiarity with the Social Security system, with post-retirement health care insurance coverage, including Medicare and long-term care (LTC) insurance. For some people, retirement may be an eagerly anticipated event, an opportunity to enjoy so many things that working may have precluded--travel, hobbies, and more family time. For other people, even the word "retirement" may conjure up feelings of fear or dread, particularly for those employees who work without the benefit of pension or other retirement plans. And newspaper stories predicting the collapse of the Social Security system can certainly compound anxiety. Whether you are financially comfortable or are of limited means, however, retirement planning is possible and can help you take control of your own future.

How can you determine your retirement income needs?

To determine your retirement income needs, you'll want to evaluate your present circumstances--your income, your expenses, your assets, and your debts. Next, you'll need to think about your future circumstances. There are four main sources for your retirement income: Social Security, pensions or other retirement vehicles, your investment portfolio, and savings. If you predict that your current income will not provide you with your desired retirement lifestyle, there are certain steps you can take now to help change your circumstances.

You'll want to think about your future sources of income, but also about where you'll live. Will you continue to live in your current home, for instance, or will you move to a condominium or retirement community? And if your employer typically provides early retirement packages to its employees, you'll need to know how to evaluate such packages from a number of perspectives. For information about the above, see Determining Your Retirement Income Needs. See also Personal Residence Issues in Retirement and Considering an Offer to Retire Early--Should You Take It?

How do you save for retirement?

Learning how to save for retirement is imperative. There are a number of retirement vehicles available, including traditional and Roth IRAs, employer-sponsored retirement plans, nonqualified deferred compensation plans, stock plans, and commercial annuities. Proper retirement planning requires an understanding of the workings of these tools.

In addition, your personal investment planning can help you on the road toward your retirement goals. The sooner you start, the longer you'll have to accumulate funds for retirement.

You'll want to understand the taxation of your retirement and investment vehicles. This is especially important since the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act). The 2003 Tax Act reduced the capital gains tax rates and the tax rates of certain dividends, making the decision to allocate assets inside or outside a retirement plan more crucial.

Finally, you may want to learn strategies for handling the competing demands of educating your children and retiring. For information on all of the above, see Saving for Your Retirement.

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What should you know about distributions from IRAs and other retirement plans?

Effective retirement planning involves not only an awareness of the types of savings vehicles available, but also an understanding of taking distributions from these vehicles. In particular, you should be familiar with the income tax ramifications of distributions (including a possible 10 percent premature distribution penalty tax for distributions made prior to age 59 ½). You may be interested in knowing whether you can borrow money from your retirement plan, whether it is better to receive your retirement money in one lump sum or in monthly checks, and whether you can roll your retirement plan balance into an IRA. In addition, you may be concerned about naming one or more beneficiaries for your IRA or employer-sponsored retirement plan. What are the tax implications? What about required minimum distributions from the plan after you reach age 70½? For information about these and many other related topics, see IRA and Retirement Plan Distributions.

What if you are an executive or business owner?

A number of additional retirement planning tools are often available for executives, such as nonqualified deferred compensation plans offered by employers to their key employees. If you're an executive, you should realize that nonqualified plans and stock plans can be valuable tools for retirement planning. You should understand the mechanics of the special benefits afforded by your employer, including the tax implications for you.

If you are a business owner, on the other hand, you have some special retirement planning concerns of your own. In particular, you may want to plan for the succession of your business to family members or to others. You may also want to know which retirement plans are best suited to your form of business. For information about these and related topics, see Special Planning Considerations for Executives, or Planning for a Succession of a Business Interest, or Retirement Planning Options for Business Owners.

How do Social Security and other government benefits programs impact retirement planning?

If you're planning for retirement, you should also consider the Social Security income (if any) you'll be receiving in the future. In fact, it is possible for you to estimate your Social Security benefits ahead of time. You may want to check your Social Security record periodically to ensure that you have met the eligibility requirements and that your information is accurate and complete.

You'll also want to become familiar with ways to optimize your Social Security benefits and minimize their taxation. The timing of your receipt of benefits can be important, as can the impact of post-retirement employment. For more information, see Social Security. Other governmental programs should also be considered when planning for retirement.

In particular, you should review the topics of Medicare and Medicaid. You should know what Medicare does and does not cover and what other health care options are available to you. How expensive are these governmental and supplemental health programs? What are the eligibility requirements? Medicaid planning can be particularly important for people of modest means. You should know the Medicaid eligibility requirements, the penalties for transferring assets inappropriately, and the various strategies available for protecting assets. In addition, you should become familiar with the specific methods of protecting your personal residence and the extent to which your state can impose liens on your property and pursue recovery remedies after your death. If you are planning for your post-retirement years, you should also gain some familiarity with long-term care insurance, nursing homes, retirement communities, assisted living, and other housing options for elders. For information on all of the above, see Health Care in Retirement.

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Do government employees have special retirement concerns?

If you work for the federal government, a state government, a railroad, or if you are in the military, your retirement benefits may be subject to special rules. You should know how your retirement plan works, what distribution rules apply, how your survivors can benefit, how your plan may be integrated with Social Security, and what tax rules apply.

For more information, see Retirement Programs for Federal and State Employees, or Military Benefits, or Railroad Retirement System.

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Determining Your Retirement Income Needs What is it?

Determining your retirement income needs is a process that helps you identify your retirement planning needs based on your desired standard of living and the resources you'll have available. Today, you can typically no longer rely on Social Security benefits and a company pension check to fulfill all your retirement income needs.

Social Security benefits will probably satisfy only a fraction of your overall retirement income needs, and generous company pensions have largely been replaced in many cases with employer-sponsored retirement plans that are funded largely with employee dollars. A successful and rewarding retirement requires you to plan ahead in order to help ensure that you have sufficient retirement income to last you for your entire retirement.

Determining your retirement income needs requires a discussion of the various stages of retirement planning, including preretirement, the transition into retirement, and retirement.

Preretirement Your retirement is sometime in the future--maybe 10 years, maybe 30 years down the road. If so, you've got a little breathing room. The single biggest mistake that you can make right now is to put off thinking about your retirement. The more time you have, the more you can hope to accomplish, so the sooner you start, the better off you should be. You've got a lot to think about. There are many factors to consider, including your expected sources of retirement income, your retirement income needs, and how you can use those sources of retirement income to fulfill your retirement income needs. See our topic discussion, Preretirement.

The transition into retirement If retirement is right around the corner, you've got some important decisions to make. If you haven't done so, spend some time forming a good picture of your retirement financial position. To the best of your ability, estimate your retirement income and expenses as discussed in preretirement. As retirement approaches, though, you have to consider the impact of when you retire. Early retirement and delayed retirement, through choice or necessity, can raise certain issues you'll want to understand. See our topic discussion, The Transition into Retirement.

Retirement When you retire, there are still some retirement issues that you may need to consider. These include the effect of working during your retirement, and the impact of other sources of income on your Social Security benefits. Also, required minimum distributions from your IRA or employer-sponsored retirement plan may be an issue. See our topic discussion, Retirement.

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Estimating Your Social Security Benefits What is estimating your Social Security benefits?

Estimating your Social Security benefits is particularly important when you are planning for retirement, although you may be interested in estimating survivor's benefits or disability benefits as well. When planning for retirement, you should neither overlook nor overstate the value of your Social Security benefits. Despite the anxiety some baby boomers feel over the future of Social Security, funds in the trust that pays benefits will actually rapidly increase in the short-term (10-15 years). Predicting the future of Social Security is difficult, however, because to keep the system solvent, some changes must be made to it. The younger and wealthier you are, the more likely that these changes will affect you. But even if you retire in the next few years, remember that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said: "The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built." Estimating your Social Security benefits now will not only help you plan an effective long-term retirement strategy, but it can also help you understand what benefits might protect your family if you were to die or become disabled.

Obtaining a benefits estimate Social Security Statement (a.k.a. the Personal Earnings and Benefit Estimate Statement) The most practical way to estimate your benefits is by having it done by the Social Security Administration (SSA).

You can obtain an estimate by filling out form SSA-7004-SM "Request for Earnings and Benefit Estimate Statement." You can get this form from your local SSA office, by calling (800) 772-1213, or online at www.ssa.gov. You supply your actual earnings (wages and/or net self-employment income) for the previous year and your estimated earnings for the current year. You also show your expected future annual wages (in today's dollars) and the age at which you expect to retire. The SSA will send you a benefits estimate statement within a few weeks. Your Social Security Statement will provide you with the following information: • Estimates of future benefits to which you may be entitled • Your lifetime earnings according to your Social Security earnings record • An estimate of how much Social Security and Medicare tax you have paid, based on your covered earnings When you receive your statement, you should pay close attention to the earnings information section. Reporting or clerical errors sometimes occur. If you think your earnings have been incorrectly reported, you have a limited time to correct the information (three years, three months and 15 days after the end of the year of the earnings). If you are age 25 or older and have a Social Security number and earned income, you can expect to receive an annual Social Security Statementfrom the SSA. This statement contains information that is similar to the information found on the version you will request from the SSA, except that the requested version allows you to project your own future earnings. Note, however, that if you are already receiving benefits, you won't receive this annual statement.

Estimating benefits with ANYPIA If you want to try to estimate your benefits yourself or with the help of a financial professional, you can use the Social Security Administration's benefit estimate computer program, called ANYPIA. The benefit estimate computer program may produce results different from the official calculation. However, according to the Social Security Administration, it usually closely matches the official calculations. Before you use this program, you may need to request a Social Security Statementanyway, because you will need to enter your past earnings into the ANYPIA program. You can find this calculator and other simplified calculators on the Social Security website under Social Security Retirement Planner.

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Understanding how your benefit amount is calculated Your Social Security benefits will be based on your average lifetime earnings, expressed as your primary insurance amount (PIA). Calculating your PIA is complicated because some factors used in the benefit formula change annually. To simplify the calculation, as well as make it more accurate, it might be helpful to use the SSA's software program or obtain a benefit estimate directly from the SSA (see preceding section).

However, knowing how your PIA is calculated may be useful in benefit planning. Currently, the two PIA calculation methods most frequently used are: 1. The simplified old-start benefit method--This method is used if age 62, disability, or death occurred prior to 1979. It averages actual (not indexed) earnings and uses a table to calculate the PIA. 2. The wage indexing method--This method has been used since 1979. Indexing earnings is a way of adjusting them to reflect changes in wage levels throughout years of employment. This ensures that your benefits reflect increases in the standard of living. In general, the wage indexing method calculates your PIA by indexing your lifetime earnings up to and including the year you turn 59. Then, your highest earnings for a specific number of years (usually 35) are averaged and a benefit formula is applied to this figure to calculate the PIA. Two other benefit computation methods are less frequently used: 1. "Special minimum" benefit tables are used sometimes to compute benefits payable to some individuals who have long periods of low earnings and who have at least 11 years of coverage.

2. Flat-rate benefits are provided to workers (and to their spouses or surviving spouses) who became age 72 before 1969 and who were not insured under the usual requirements.

How to calculate your PIA using the wage-indexing method The wage indexing method can be used to calculate retirement, survivor's, and disability benefits. However, the method used to calculate disability benefits is slightly different. The following discussion applies only to calculating your PIA for retirement and death benefits.

Follow these steps to calculate your PIA: • Count the number of years elapsed between 1951 (or the year you turned 22, if later) and the year you turned 61. If you were born in 1929 or later, this number will be 40.

Example(s): Peter retired from his job in 1992. He was 62. He turned 22 in 1952, so count the number of years between 1952 and 1991(the year he turned 61). Forty years have elapsed. • Use the number of elapsed years to determine the number of benefit computation years. To do this, subtract five from the number of computation elapsed years. This figure will be used to calculate your average indexed monthly earnings (AIME). If you were born in 1929 or later, this number will be 35.

Example(s): Peter's computation elapsed year figure is 40. 40-5=35. So, Peter's benefit computation year figure is 35. • Use your earnings record to calculate your indexed earnings. To do this, use the appropriate table to determine what the indexing average wage was or will be in the year you turn 60. Then, look to see what the indexing average wage was in the year you are indexing. These figures become part of an indexing ratio applied to each year of earnings starting with 1951 and ending with the year you turn 59.

Earnings before 1951 are generally disregarded. Earnings in the year you turn 60 (your indexing year) and earnings in all later years are considered in calculating your PIA, but they are not indexed. The

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ratio can be expressed as: Actual earnings in year being indexed

Multiplied by Indexing average wage in year you turned 60 divided by Indexing average wage in year being indexed

The result will equal your indexed earnings for the year being indexed.

Example(s): Peter started working in 1951 and retired in 1992. For each year starting with 1951 and ending with 1989 (the year he turned 59), calculate his indexed earnings. His indexing year is 1990 (the year he turned 60). For example, Peter's earnings in 1965 were $2,000. In 1965, the indexing average wage was $4,658.72. In 1990, the indexing average wage was $21,027.98.

Calculate his 1965 indexed earnings: $2,000 multiplied by $21,027.98 divided by $ 4,658.72 = $9,027.36 Tip: Actual earnings are earnings credited to an individual's Social Security record. However, each year's actual earnings are subject to a maximum earnings limit. If your earnings for the year you are indexing exceed the maximum limit, then you must substitute the maximum earnings limit amount for your actual earnings amount in the ratio.

Example(s): In 1965, the maximum earnings limit was $4,800. Had Peter's actual earnings exceeded that amount, he would have replaced his actual earnings figure in the ratio with $4,800 to calculate his indexed earnings for 1965.

Once you have indexed your earnings for each year you have worked before age 60, you will be able to use those figures to calculate your average indexed monthly earnings (AIME).

• Calculate your AIME by selecting your highest earnings for the benefit computation years (including any earnings not subject to indexing). Add these up and divide by the total number of months elapsed during these years.

Example(s): Peter had 39 years of indexed earnings and two years of earnings (1990 and 1991) not indexed but included in the calculation. Select his 35 highest earning years. The earnings for these years total $950,000. Divide this figure by 420 months (35 x 12). His AIME is $2261.90.

• Calculate the PIA for the year you attain age 62 by applying percentages to certain dollar amounts of the AIME. The percentages are fixed, but the dollar amounts (called bend points) are adjusted each year for inflation.

Example(s): Peter attained age 62 in 1992. His PIA would be calculated using 1992 bend points--90 percent of the first $387 of his AIME, and adding 32 percent of the AIME in excess of $387 through $2,333, and adding 15 percent of the AIME in excess of $2,333. So, Peter's PIA is calculated to be the sum of $348.30 (90 percent of $387) plus $599.65 (32 percent of $1,873.90) or $947.95, rounded to the next lower multiple of 10 cents, $947.90.

Bend points make calculating your future PIA difficult because the bend points for each year are only published by the Department of Health and Human Services on November 1 of the preceding year. For 2009, the bend points are $744 and $4,483.

• Adjust your PIA to account for changes in the cost-of-living allowance (COLA) yearly.

Example(s): If Peter's PIA was $947.90 when he retired in October 1992, then his PIA will be adjusted for COLA in December 1992, and his January 1993 benefit check will reflect the change.

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Using your PIA to determine your benefit amount Once the PIA has been calculated, all your benefits (and those of your family members who are dependent upon your Social Security record) will be based on this figure. Your PIA is the maximum benefit that you could receive once you become eligible.

Your maximum benefit may be payable if: • You retire at normal retirement age • You are a widow or widower who is at least normal retirement age • You are a disabled worker In other circumstances, the benefits that you receive will be a certain percentage of your maximum benefit. For example, if you elect to receive early retirement benefits, your maximum benefit will be reduced by a certain percentage for each month of early retirement. If you or your family members are eligible for reduced benefits, the reduction will be expressed as a percentage of your PIA. Example(s): Mr. Jones retired at age 65 (his normal retirement age) after working for many years.

His PIA was determined to be $1,176. He receives the maximum retirement benefit (100 percent of his PIA) so his monthly benefit check is $1,176. His wife retired at age 65 as well (her normal retirement age). Since her own PIA was less, she decided to base her retirement income on her husband's PIA. She is entitled to 50 percent of his PIA, so she receives a monthly benefit check of $588.

The following chart summarizes the relationship between your PIA and your eventual benefits: Benefit

Requirements

Amount

Retirement

• Normal retirement age • 62 or above, but less than normal retirement age

• 100% of PIA • PIA reduced by 5/9 of 1% for each month under normal retirement age, up to 36 months, and by 5/12 of 1% thereafter

Disability

• Not offset by other public disability benefits

• 100% of PIA

Spouse's benefit

• Caring for dependent child • Normal retirement age • Age 62 or above, but less than normal retirement age

• 50% of spouse's PIA further reduced by 25/36 of 1% for each of the first 36 months under normal retirement age

Child's benefit

• Child of retired or disabled • Child of deceased worker

• 50% of worker's PIA • 75% of worker's PIA

Mother's or father's benefit

• Child must be under 16 or disabled

• 75% of deceased worker's PIA

Widow(er)'s benefit

• Normal retirement age • Age 60 or above, but less than normal retirement age

• 100% of deceased worker's PIA • Reduced; 71½% of deceased worker's PIA, or more

Disabled widow(er)'s benefit • Starting at age 50-60

• 71½% of deceased worker's PIA

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Page 19 of 151 • One dependent parent • Two dependent parents

• 82½% of deceased worker's PIA • 75% of deceased worker's PIA (each)

Factors that can increase or decrease your benefit Early retirement If you elect to receive retirement benefits early (before normal retirement age), your benefit will be reduced proportionately. You can elect to receive retirement benefits as early as age 62. For each month of early retirement, your total benefit will be reduced by 5/9 of 1 percent, up to 36 months, and by 5/12 of 1 percent thereafter.

Delayed retirement If you delay receiving retirement benefits past normal retirement age, you will receive a higher benefit when you retire. Late retirement may increase your average earnings (which may, in turn, increase your benefit). You will also receive a special delayed retirement credit. This credit is figured as a percentage of your Social Security benefit and is paid in addition to your regular benefit amount. It does not affect your PIA upon which your benefit is based.

This credit varies depending on the year in which you were born and how many months or years after normal retirement age you retire (up to the maximum age of 70). For example, if you were born in 1944 (your normal retirement age is 66), you will earn an extra 8 percent of your benefit for every year you delay retirement up to age 70. This means that if you delay receiving your retirement benefit until age 70, your benefit payment will be 32 percent greater than it would have been if you began receiving retirement benefits at age 66.

Earnings during retirement Any income you earn after you retire must be reported to the Social Security Administration and may reduce your retirement benefit if you have not yet reached normal retirement age. However, some of your annual earnings are exempt and won't affect your benefit.

Simultaneous benefits Occasionally, you may be entitled to receive benefits based not only on your earnings record, but on someone else's as well. This often happens when a married couple retires.

Example(s): Mr. Jones is not planning on retiring and receiving Social Security retirement benefits until he is 68. His PIA is $1,176. His wife, who is 63, wants to retire now, but she can't begin receiving a spouse's retirement benefit until her husband begins receiving his retirement benefits.

However, since she is already over the age of 62, she can receive retirement benefits based on her own PIA. Her benefit, adjusted for early retirement, will be $400. Later, when her husband retires, she can receive her own retirement benefit and a spouse's benefit of $188, the difference between her own worker's benefit ($400) and the spouse's benefit she would have received based on 50 percent of her husband's PIA ($588).

A family maximum benefit applies Your family may receive benefits based on your earnings record. There is, however, a limit to the amount of monthly benefit that can be based on an individual's Social Security record. The limit varies but generally ranges from 150 to 180 percent of your PIA. Benefits to family members may be reduced if they exceed the family maximum. The formula used to compute the family maximum is similar to that used to compute the PIA.

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Saving for Your Retirement Major considerations How much will you need in retirement?

When do you plan to retire? What kind of lifestyle do you desire? How much do you have right now that you can count on for your retirement? What about Social Security; do you know what kind of benefits you can expect?

These are all factors you will need to consider when you determine how much you'll need.

Know how much you have Take an honest look at your present net worth. If you're like most people, you've got a long way to go before you can afford to retire. Knowing how much you currently have earmarked for retirement will assist you in saving for your retirement.

Implement a savings plan Take an honest look at your current spending. Just as in planning for other financial goals, you need to implement a savings plan. Think about establishing a long-term systematic savings plan to put aside funds for retirement. If you haven't already done so, consider the benefits of establishing and sticking to a spending plan.

Decide where to put your dollars You've freed up some cash, and you want to put it where it will do the most good. You need to consider some options: • Take advantage of employer-sponsored retirement plans • Utilize IRAs • Evaluate other investment alternatives

Take full advantage of employer-sponsored retirement plans Taking advantage of retirement plans in general Does your employer offer a retirement plan? If so, be sure that you're taking full advantage of it. If your employer has a defined benefit plan (a traditional pension plan, with pension benefits typically based on the number of years you work and your level of compensation), make yourself familiar with the details of the plan. Although most aspects of such a plan are beyond your control (e.g., you can't make contributions), you should know how your plan works. How long do you have to work before you have rights under the plan (the plan's vesting schedule)? When are you entitled to a full pension? This information is vital if you're considering leaving your employment.

If your employer offers a defined contribution plan (such as a 401(k) plan, to which contributions can be made by employer and/or employee), much depends upon the specific type of plan. The one feature that these plans have in common is that the contributed funds grow tax deferred. This is significant, because investments in these plans can grow more rapidly than identical investments that don't grow tax deferred. Depending upon the type of plan that you have, you may be able to make voluntary contributions.

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Maximize employer-matching contributions Some retirement savings plans, such as 401(k) plans, 403(b) plans (tax-sheltered annuity plans for employees of public schools and certain tax-exempt organizations), and thrift savings plans (plans to which you generally make after-tax contributions), allow employers to match contributions that you make up to a specified level. Since this is basically free money (once you're vested in those employer dollars), consider taking advantage of it.

Contribute enough to the plan so that your employer contributes the maximum matching amount. For more information, refer to the specific plan in which you participate.

Self-employed individuals should consider establishing their own retirement plans If you're self-employed, seriously consider establishing a retirement plan for yourself. For example, a simplified employee pension (SEP) plan is relatively easy to implement (it's really not much more than a big IRA), and it allows you to save significant funds for retirement or you might consider an individual 401(k) plan. If you're a business owner with employees, you should think about setting up an employer-sponsored retirement plan. There are a variety of retirement plans that are appropriate for sole proprietors and partnerships, corporations, and tax-exempt organizations.

If you do contract work for a tax-exempt organization or a state or local government If you perform services as an independent contractor for a state or local government or a tax-exempt organization that sponsors a Section 457(b) plan (a specific type of deferred compensation plan), you may be able to participate in that plan. If you can participate, you can defer a significant portion of your compensation to the plan.

Individual retirement accounts (IRAs) Contribute to an IRA each year IRAs offer significant tax incentives to encourage you to save money for retirement. You can contribute up to $5,000 to your IRA in 2010 (and 2009) ($6,000 if you're age 50 or older), as long as you have at least that amount in compensation for the year. The types of IRAs that you can use (and the corresponding tax advantages) depend upon your income level, filing status, and whether or not you're covered by an employer-sponsored retirement plan.

If your spouse does not have compensation, contribute to an IRA for your spouse You may be able to set up and contribute to an IRA for your spouse, even if he or she received little or no compensation for the year. To contribute to a spousal IRA, you must meet the following four conditions: 1. You must be married at the end of the tax year 2. You must file a joint federal tax return for the tax year 3. You must have taxable compensation for the year 4. Your spouse's taxable compensation for the year must be less than yours

Choosing investments within your retirement plan It's important to understand that the earnings potential offered by a retirement plan (e.g., 401(k) or IRA) is not generated by the plan per se, but by the investments held by the plan (e.g., stocks, bonds, mutual funds).

Choosing the right mix of investments within your plan is just as important as choosing the right plan itself. When making your choices, many factors should be considered including your time horizon, your tolerance for risk, and the tax implications. For example, it may not make sense to hold tax-exempt securities within a plan that is tax deferred.

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The Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act) complicates matters further. The 2003 Tax Act reduces capital gains tax rates and the tax rates on qualifying dividends. However, investments held in retirement plans will not benefit from these lower tax rates. Thus, holding investments that generate income subject to these lower rates in a tax-deferred plan is now less appealing. This does not mean that such investments are inappropriate for retirement plans, only that you should consider carefully your overall investment portfolio in deciding what investments to hold within, and outside of, a retirement plan.

Evaluate nonqualified investment programs Annuities and retirement Annuities, which are funded with after-tax dollars, grow tax deferred. When you retire, if you're over age 59½, you may make withdrawals or begin taking payments that will continue as long as you live. The tax-deferred earnings portion of these withdrawals or payments will then be taxed as ordinary income. Keep in mind that, as with IRAs, if you withdraw any money from an annuity before you're 59½, you'll generally have to pay an additional 10 percent penalty tax.)

Life insurance and retirement Some life insurance has certain tax advantages, such as the tax-deferred growth of the cash value of permanent life insurance. This type of life insurance can be a supplementary source of retirement income, in addition to providing financial protection to your beneficiaries.

Review other investments You should consider carefully your current investment portfolio. Are you putting your money in appropriate investments?

Other considerations Does your employer offer or are you in a position to take advantage of any of the following?

• Nonqualified deferred compensation plans • Stock plans • Other employee benefits

Choose the right strategy to save for your retirement You know that you should be taking advantage of employer-sponsored retirement plans, making yearly contributions to IRAs, and considering all of your other options, but how do you decide which to do first? If you have the cash, you should probably be doing all three. If not, conventional wisdom says you should always consider taking advantage of any employer-matching contributions within an employer-sponsored retirement plan. Contribute at least enough to capture the full match offered by your employer.

Beyond that level of savings, you have to think about whether it's better to make additional voluntary contributions to your employer-sponsored retirement plan or put those dollars into an IRA or elsewhere. Annuities and life insurance, for example, play an important role in many peoples' retirement planning.

Certainly, if you have not reached the pretax contribution limit at work, funneling more dollars into your 401(k) or other employer-sponsored plan probably makes the most sense. The ability to make systematic contributions straight from your paycheck is a huge practical plus for most individuals, and the power of tax-deferred savings can be great. Although the traditional IRA also provides tax-deferred growth, the ability to deduct contributions is phased out for high- and middle-income taxpayers also participating in qualified retirement plans. If you earn too much to make a deductible IRA contribution, you should probably fully fund your employer-sponsored retirement plan before making nondeductible contributions to a traditional IRA.

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The Roth IRA and Roth 401(k) /403(b) offer yet more options. With these arrangements, you invest after-tax dollars, but you don't pay income tax on the earnings for qualified withdrawals. Tax-free earnings are even better than tax-deferred earnings because tax-deferred earnings will eventually be taxed when you start taking distributions. In deciding between a Roth IRA and a traditional IRA or other alternative, or between pre-tax and Roth 401(k)/403(b) contributions, you should consult a financial professional who can make some planning assumptions and crunch the numbers to see what makes the most sense.

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Retirement Plans: The Employee Perspective What is the employee perspective on employer-sponsored retirement plans?

Qualified employer-sponsored retirement plans can provide a number of tax and nontax benefits to employees.

The employee perspective on these plans should certainly consider the obvious tax deferral and retirement savings benefits. Additionally, however, employees should consider various strategies to optimize their benefits.

For example, employees will approach their retirement plans most effectively when they take full advantage of employer-matched savings and by remaining with a particular company at least until vesting has occurred. In some cases, moreover, the advantages and disadvantages of borrowing from employer-sponsored plans should be evaluated.

How are employer-sponsored retirement plans categorized?

Employer-sponsored retirement plans may be categorized in two ways: (1) they're classified as either qualified or nonqualified, and (2) qualified plans are further subdivided into defined benefit plans and defined contribution plans.

Qualified versus nonqualified plans Qualified plans are those that offer significant tax advantages to employers and employees in return for adherence to strict Employee Retirement Income Security Act (ERISA) and Internal Revenue Code requirements involving participation in the plan, vesting, funding, disclosure, and fiduciary matters.

Nonqualified deferred compensation plans, by comparison, are subject to less extensive ERISA and Code regulation; and the design and operation of these plans is generally more flexible. However, nonqualified plans are usually not as beneficial to either the employer or the employee from a tax standpoint.

Defined benefit plans versus defined contribution plans A defined benefit plan is a qualified employer pension plan that guarantees a specified benefit level at retirement; actuarial services are needed to determine the necessary annual contributions to the plan. These plans are typically funded by the employer.

A defined contribution plan, by comparison, is one in which each employee participant is assigned an individual account, and contributions are defined (in the plan document) on an annual basis, often in terms of a percentage of compensation. Unlike a defined benefit plan, a defined contribution plan doesn't promise to pay a specific dollar amount to participants at retirement. Rather, the benefit payable to a participant at termination or retirement is the value of his or her individual account.

Why should an employee participate in a qualified employer-sponsored retirement plan?

Participation in an employer-sponsored retirement plan is probably the most effective way to save for retirement.

If you have an individual retirement account (IRA) rather than an employer-sponsored plan, you know that your annual contribution amount is relatively limited. Employer-sponsored plans allow much higher annual contributions. And, if your primary method of saving for retirement is to personally invest in securities, there is always a temptation to spend your savings prior to retirement. The temptation to withdraw your money prematurely from an employer-sponsored plan is severely curtailed. This is because many qualified plans don't permit in service withdrawals at all, or permit them only for limited reasons (for example, financial hardship). In addition, a 10 percent early distribution penalty generally applies to the taxable portion of any withdrawal you make before age 59½ (unless an exception applies).

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In addition to the retirement savings aspect of employer-sponsored retirement plans, these plans can offer significant tax advantages. Certain defined contribution plans allow employees to defer part of their salaries into the plan. Deferring part of your compensation can lower your present taxes. Postponing receipt of this taxable income is also useful, because when you eventually realize the income at some future point, it's possible that you'll be retired and/or in a lower tax bracket. Keep in mind that the earnings on your plan contributions grow tax deferred until you take distributions. 401(k) and 403(b) plans can also permit Roth contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there's no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all accumulated earnings are free from federal income taxes when distributed from the plan.

How can an employee optimize his or her retirement benefits?

One way to optimize your retirement benefits is to ensure that you contribute to the plan as much as the law allows in a given year. Also, keep in mind that if your salary increases, so should your contribution level. For example, it's nice for you to contribute a flat $100 to your 401(k) plan each month, but if your salary increases by $1,000 each year, the amount of your contribution should increase also in order to maximize your retirement savings. Contributing to an employer-sponsored retirement plan, such as a 401(k) plan, can help you save for retirement, defer taxes on your current income, and defer (or eliminate) taxes on the earnings.

You can also optimize your retirement benefits by taking full advantage of employer matching contributions.

Some employers, for example, might contribute 50 cents for every dollar you contribute to the plan. In a very real sense, this gives you an automatic 50 percent return on your investment.

Another consideration is vesting. If your employer matches your contributions (or funds the pension plan entirely), it may impose a vesting schedule on you. This means that you will not be able to take ownership in the employer-funded part of a pension plan until certain conditions have been met. Typically, the employer will require you to work for the company for a set number of years before you will become vested. If vesting occurs after 3 years of service and you're thinking of leaving the company after 2 and one-half years, it would be advisable for you to try to stick around for another six months.

Tip: Employer contributions to SIMPLE IRA, SIMPLE 401(k), and SEP IRA plans are always 100 percent vested.

Should you borrow money from your retirement plan?

Some retirement plans, such as the 401(k) plan, may allow you to borrow money from the plan under certain conditions. Typically, the interest charged on such a loan will be less than that of an unsecured bank loan. When you pay the money back, you're really paying the money to yourself. Therefore, borrowing money from your 401(k) plan may be the cheapest source of funds you can find for a loan.

When you take a loan from your 401(k) plan, the funds you borrow are removed from your plan account until you repay the loan. While removed from your account, the funds aren't continuing to grow tax deferred within the plan. So the economics of a plan loan depend in part on how much those borrowed funds would have earned if they were still inside the plan, compared to the amount of interest you're paying yourself. This is known as the opportunity cost of a plan loan, because you miss out on the opportunity for more tax-deferred investment earnings.

Also, while the interest you pay on a loan is usually deposited into your plan account, the benefits of this perk are somewhat illusory. To pay interest on a plan loan, you first need to earn money and pay income tax on those earnings. With what is left over after taxes, you pay the interest on your loan. When you later withdraw those dollars from the plan, they are taxed again because plan distributions are treated as taxable income. In effect, you are paying income tax twice on the funds you use to pay interest on the loan.

What are some of the more popular employer-sponsored retirement plans, and how do they work?

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There are several plans; each has its own advantages and disadvantages. Along with the traditional pension plan (the defined benefit plan), there are 12 retirement plans that are most often offered by businesses: • 401(k) plan • Age-weighted profit-sharing plan • Employee stock ownership plan (ESOP) • Keogh plan • Money purchase pension plan • New comparability plan • Profit-sharing plan • SIMPLE 401(k) • SIMPLE IRA • Simplified employee pension plan (SEP) • Target benefit plan • Thrift savings plan In addition, there are two nonqualified retirement plans that are especially popular with tax-exempt organizations: • Section 403(b) plan • Section 457 plan 401(k) plan A 401(k) plan, sometimes called a cash or deferred arrangement, is a defined contribution retirement plan that allows employees to elect either to receive their compensation paid currently in cash or to defer receipt of the income until retirement. If deferred, the amount deferred is pretax dollars that go into the plan's trust fund; these dollars will be invested and then eventually be distributed (with investment earnings) to the employees. The employee is taxed when money is withdrawn or distributed to him or her from the plan. Often, employers make contributions matching some or all of employee deferrals in order to encourage employee participation. The business can deduct these employer contributions, subject to certain limitations. 401(k) plans can also permit Roth contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions.

This means there's no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all accumulated earnings are tax-free when distributed from the plan.

Age-weighted profit-sharing plan An age-weighted profit-sharing plan is a defined contribution plan in which contributions are allocated based on the age of plan participants as well as on their compensation, allowing older participants with fewer years to retirement to receive much larger allocations (as a percentage of current compensation) to their accounts than younger participants. F Employee stock ownership plan (ESOP) An employee stock ownership plan (ESOP), sometimes called a stock bonus plan, is a defined contribution plan in which participants' accounts are invested in stock of the employer corporation. The employer funds the plan.

When a plan participant retires or leaves the company, he or she receives the vested interest in the ESOP in the form of cash or employer securities.

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Keogh plan A Keogh plan (sometimes called an HR-10 plan) is another name for any qualified retirement plan adopted by self-employed individuals. Only a sole proprietor or a partner may establish a Keogh plan; an employee cannot.

Keogh plans may be set up either as defined benefit plans or as defined contribution plans. A Keogh plan allows you to contribute pretax dollars to the retirement plan (providing a tax deferral to you).

Money purchase pension plan A money purchase pension plan is a defined contribution plan in which the employer makes an annual contribution to each employee's account in the plan. The amount of the contribution is determined by a set formula, regardless of whether the employer is showing a profit. Typically, the employer's contribution will be based on a certain percentage of each participating employee's compensation.

New comparability plan A new comparability plan is a variant of the traditional profit-sharing plan. By dividing up plan participants into two or more classes, the new comparability plan allows businesses to maximize plan contributions to higher-paid workers and key employees and minimize allocations to other employees.

Profit-sharing plan A profit-sharing plan is a defined contribution plan that allows for employer discretion in determining the level of annual contributions to the retirement plan; in fact, the employer can contribute nothing at all in a given year if it so chooses. As the name suggests, a profit-sharing plan is usually a sharing of profits that may fluctuate from year to year. Generally, an employer will contribute to a profit-sharing plan in one of two ways: either according to a set formula or in a purely discretionary manner.

SIMPLE 401(k) A savings incentive match plan for employees 401(k), or SIMPLE 401(k), is a retirement plan for small businesses (those with 100 or fewer employees) and for self-employed persons, sole proprietorships, and partnerships. The plan is structured as a 401(k) cash or deferred arrangement and was devised in an effort to offer self-employed persons and small businesses a tax-deferred retirement plan without the complexity and expense of the traditional 401(k) plan. The SIMPLE 401(k) is funded with voluntary employee pre-tax or Roth contributions, and mandatory, fully vested, employer contributions. The annual allowable contribution amount is lower than the annual contribution amount for regular 401(k) plans.

SIMPLE IRA A savings incentive match plan for employees IRA (SIMPLE IRA) is a retirement plan for small businesses (those with 100 or fewer employees) and self-employed persons that is established in the form of employee-owned individual retirement accounts. The SIMPLE IRA is funded with voluntary employee pre-tax contributions and mandatory, fully vested, employer contributions. The annual allowable contribution amount is significantly higher than the annual contribution amount for regular IRAs. Simplified employee pension plan (SEP) Self-employed persons, including sole proprietors and partners, can sometimes set up simplified employee pension plans (SEPs) for themselves and their employees. A SEP is a tax-deferred qualified retirement savings plan that allows contributions to be made to special IRAs, called SEP-IRAs, according to a specific formula.

Except for the ability to accept SEP contributions (i.e., allowing more money to be contributed and deducted) and certain related rules, SEP-IRAs are virtually identical to regular IRAs. Employer contributions are fully vested.

Target benefit plan A target benefit plan is a hybrid of a defined benefit plan and a money purchase pension plan. It resembles a defined benefit plan in that the annual contribution is determined by the amount needed each year to accumulate

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a fund sufficient to pay a specific targeted benefit amount. It is like a money purchase plan in that the actual benefit received by the participant at retirement is based on his or her individual balance.

Thrift savings plan A thrift savings plan is a defined contribution plan that is similar to a profit-sharing plan but has features that provide for (and encourage) after-tax employee contributions to the plan. This means that the employee must pay tax on his or her money before contributing to the plan. Typically, a thrift savings plan would provide after-tax employee contributions with matching employer contributions. Most thrift plans have been converted to 401(k) plans.

Section 403(b) plan A 403(b) plan, also known as a tax-sheltered annuity or a tax-deferred annuity, is a special type of retirement plan under which certain government and tax-exempt organizations (including religious organizations) can purchase annuity contracts or can contribute to custodial accounts for eligible employees. Employees are not taxed on contributions made to the plan on their behalf until they receive their benefits. Section 403(b) plans generally fall into one of two types of plans: a salary reduction plan or an employer-funded plan. A 403(b) plan is not a qualified plan, but it is subject to many of the same rules, and salary reduction 403(b) plans are similar to 401(k) plans in many respects. Like 401(k) plans, 403(b) plans can also permit Roth contributions. Roth 403(b) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there's no up-front tax benefit, but if certain conditions are met, your Roth 403(b) contributions and all accumulated earnings are tax-free when distributed from the plan.

Section 457(b) plan A Section 457(b) plan is a nonqualified deferred compensation plan for governmental units, governmental agencies, and nonchurch-controlled tax-exempt organizations; it somewhat resembles a 401(k) plan. Unlike a 401(k) plan, a Section 457(b) plan for a tax-exempt organization must be structured so that it's not subject to the strict requirements of ERISA.

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IRAs What is an individual retirement account (IRA)?

An individual retirement account (IRA) is a personal savings plan that offers specific tax incentives to encourage you to save for retirement. Currently, there are two types of retirement IRAs. Traditional IRAs allow for tax-deductible contributions under certain conditions. Roth IRAs (created by the Taxpayer Relief Act of 1997) are funded with after-tax dollars, but may allow for tax-free withdrawals under certain conditions.

It is important to realize that an IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. You need to decide how to invest your IRA dollars based on your own tolerance for risk and investment philosophy. How fast your IRA dollars grow is largely a function of the investments that you choose.

Tip: The term "IRA" can refer either to an individual retirement account or an individual retirement annuity. An individual retirement annuity is an annuity or endowment contract that you purchase from a life insurance company. The contract must not be transferable, and the premiums must be flexible so that if your compensation changes, your premium payments can also change. In general, the same rules that apply to individual retirement accounts also apply to individual retirement annuities.

Overview of IRA types Traditional IRAs In general Prior to 1997, there was only one type of IRA. Because it was the only type, it didn't have a special name--it was simply called an IRA. However, as a result of the Taxpayer Relief Act of 1997, this "original" IRA came to be called the "traditional" IRA to distinguish it from the newly created Roth IRA. A traditional IRA is a special type of personal savings plan that provides certain tax advantages to encourage you to save money for retirement. For 2009 and 2010, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a traditional IRA. You may also be able to contribute up to the same amounts to a traditional IRA for your spouse. Funds in a traditional IRA grow tax deferred until they are paid out to you.

Deductible versus nondeductible contributions There are two types of contributions that you can make to a traditional IRA: deductible contributions and nondeductible contributions. When you make deductible contributions, you reduce your taxable income for the year, so the dollars that you contribute are pretax. Those dollars will not be taxed until you withdraw them from the IRA. When you make nondeductible contributions, you contribute after-tax dollars that will not be taxed again later when you withdraw them from the IRA. The portion of any withdrawal that represents investment earnings is always taxed.

Your ability to make a deductible contributions to a traditional IRA depends on your annual income, your income tax filing status, and whether you (or, in some cases, your spouse) are covered by an employer-sponsored retirement plan.

Roth IRAs As mentioned, the Roth IRA is a product of the Taxpayer Relief Act of 1997. Like traditional IRA funds, funds held in a Roth IRA enjoy tax-deferred growth. But the Roth IRA is often described as the opposite of a traditional

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IRA because other key features differ. Roth IRA contributions are never tax deductible (you can contribute only after-tax dollars), but withdrawals may be completely tax free if you meet the requirements for qualifying withdrawals. For 2009 and 2010, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a Roth IRA. You may also be able to contribute up to the same amounts to a Roth IRA for your spouse.

You may or may not qualify to establish a Roth IRA. Even if you do, you may not qualify to contribute up to the annual maximum. Whether or not you can contribute to a Roth IRA depends on your annual income and your income tax filing status. Finally, if you qualify, you can convert funds from a traditional IRA to a Roth IRA (see below).

Spousal IRAs If you file your federal income tax return as married filing jointly and meet certain other conditions, you can contribute to an IRA (traditional or Roth) for your spouse even if he or she has little or no taxable compensation of his or her own for the year of the contribution. This is usually described as making a contribution to a spousal IRA. A spousal IRA is not, however, a special type of IRA. It is merely a way of describing the fact that you are making a contribution to your spouse's traditional or Roth IRA. SEP IRAs and SIMPLE IRAs A Simplified Employee Pension Plan (SEP) is a retirement plan an employer can establish for employees (self-employed individuals can also adopt a SEP plan). Employer SEP contributions, which can be as high as $49,000 a year for each employee (in 2010), are made to employee traditional IRAs (usually called SEP IRAs).

All of the rules applicable to traditional IRAs apply to SEP IRAs. In addition, employees can make their own traditional (but not Roth) IRA contributions to their SEP IRAs, subject to regular traditional IRA rules and contribution limits.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA plan) is also an employer-sponsored retirement plan. With a SIMPLE IRA, both the employer and the employees make contributions to SIMPLE IRAs established for the employees. SIMPLE IRAs are different from traditional IRAs-employees can't make regular IRA contributions to SIMPLE IRAs. After an employee participates in the SIMPLE plan for 2 years, however, the employee can roll the SIMPLE IRA assets into a traditional IRA. Deemed IRAs Employers who maintain certain retirement plans (like 401(k), 403(b), or 457(b) plans) can allow employees to make regular IRA contributions--traditional or Roth--to special accounts set up under their retirement plan. These accounts, called "deemed IRAs," function just like regular IRAs. Advantages include the fact that your retirement assets can be consolidated in one place, contributions can be made automatically through payroll deduction, the employee can take advantage of any special investment opportunities offered in the employer's plan, and protection from creditors may be greater than that available in a standalone IRA. The downside is that investment choices in an employer's plan may be very limited in comparison to the universe of investment options available through a separate IRA. Also, the distribution options available to employees and their beneficiaries in a deemed IRA may be more limited than in a standalone IRA. Because of the administrative complexity involved, most employers have so far been reluctant to offer these arrangements under their retirement plans.

Rollovers and transfers You can shift funds from one traditional IRA to another traditional IRA or from one Roth IRA to another Roth IRA. You can do this by having the trustee or custodian of one IRA transfer the funds directly to the trustee or custodian of a second IRA without ever distributing the funds to you. You can also arrange for the trustee or custodian of your IRA to distribute your funds to you. To avoid taxes and penalty, you then roll the funds over into another IRA (of the same type) by contributing the funds to that IRA within 60 days after receiving the distribution from the first IRA (the IRS can waive this 60-day rule under limited circumstances, such as proven hardship).

Shifting funds from a traditional IRA to a Roth IRA is considerably more complicated (see below).

Tip: You can also roll over funds from an employer's qualified retirement plan to a traditional IRA or

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Roth IRA. (Roth 401(k) and Roth 403(b) funds can be rolled over only to a Roth IRA, not to a traditional IRA).

Converting or rolling over funds from traditional IRAs to Roth IRAs You can convert or roll over all or a portion of the funds in your traditional IRA to a Roth IRA. If you so, those funds will be included in your taxable income for the year (to the extent that the funds consist of deductible contributions and investment earnings). The decision whether to convert funds is complicated and should not be made without consulting a professional advisor.

Tip: Special rules apply to Roth conversions that take place in 2010. For these conversions, you can report all of the resulting taxable income on your 2010 tax return, or report half on your 2011 return and half on your 2012 return.

Premature distribution tax You decide when and how much to withdraw from your traditional and Roth IRAs, but taxes and penalties imposed by the federal government will likely influence your decision-making process. A 10 percent premature distribution tax is generally assessed on the taxable portion of any distribution you take from a traditional or Roth IRA prior to age 59½. This tax is over and above regular federal income tax. There are a number of exceptions to the tax, however.

Caution: Special rules apply if you convert or roll over funds from a traditional IRA to a Roth IRA and later withdraw funds from that Roth IRA.

Required minimum distributions Like many people, you may want to keep your funds in your IRAs for as long as possible to maximize tax-deferred growth and/or preserve the funds for your beneficiaries. Unfortunately, the federal government does not allow you to do this. The required minimum distribution rule states that when you reach age 70½, you must begin taking minimum annual withdrawals from your traditional IRAs (this rule does not apply to Roth IRAs).

These annual withdrawals are based on a life expectancy calculation and are intended to dispose of your traditional IRA balance over a given period of time. You can always withdraw more than the required minimum in any year, but if you withdraw less, you will be subject to a 50 percent penalty on the shortfall.

Tip: The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.

The importance of beneficiary choice When you open a traditional or Roth IRA, you have to designate a beneficiary. This is the person or entity that will receive the funds remaining in your IRA after you die. It can be your spouse, a child or grandchild, a friend or other relative, a trust, a charity, your estate, or some combination of these (you can have more than one designated beneficiary). Obviously, your beneficiary should be someone you wish to provide for financially. What you may not realize is that choosing a beneficiary involves other important considerations. Your choice will determine how quickly the IRA funds must be distributed after your death, and could even impact the required minimum distributions that you must take from a traditional IRA during your life (if you choose a spouse who is more than 10 years younger than you). For a detailed discussion, see our separate topic discussions, Beneficiary Designations for Traditional IRAs and Employer-Sponsored Retirement Plans and Beneficiary Designations for Roth IRAs.

Investment choices appropriate for IRAs Remember that an IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. Choosing specific investments to fund your IRAs is an important decision. Here are some

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points to keep in mind: • You need to decide how to invest your IRA dollars based on your own retirement goals, tolerance for risk, investment philosophy, and other personal factors • How fast your IRA dollars grow is largely a function of the investments that you choose, as well as tax deferral • There are specific types of investments that you cannot use to fund your IRAs (such as collectibles), and there are some choices that usually make more sense as IRA investments than others (e.g., mutual funds, CDs) • If you're unhappy with your IRA investment choices, you can typically move your money to other investments offered by the same financial institution, or to a different institution • You should consider any fees associated with opening and maintaining your IRA Caution: The IRS has ruled that the wash sales rules apply if you sell stock or other securities outside of your IRA for a loss, and purchase substantially identical stock or securities in your IRA (traditional or Roth) within 30 days before or after the sale. The result is that you cannot take a deduction for your loss on the sale of the stock or securities. In addition, your basis in your IRA is not increased by the amount of the disallowed loss.

You should talk to a financial professional about choosing appropriate investments for your IRAs.

Choosing the right type of IRA How do you decide which type of IRA is right for you? As a general rule, there is no advantage to making nondeductible contributions to a traditional IRA if you qualify to make either deductible contributions to a traditional IRA or after-tax contributions to a Roth IRA. The question is: Assuming that you qualify for both, do you contribute to a traditional IRA with deductible contributions, or to a Roth IRA? There is no easy answer. You have to analyze your situation and determine which type of IRA offers the best fit for you. Read the our separate topic discussions on Traditional IRAs and Roth IRAs, and use our Decision Tools. You should also consult a financial planner, tax advisor, or other professional.

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Annuities What is an annuity?

Contract between purchaser and insurance company An annuity is a contract between you (the purchaser or owner) and the issuer (usually an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays out the principal and earnings back to you or to a named beneficiary.

Two distinct phases to annuities There are two distinct phases to the life of an annuity contract. One phase is called the accumulation (or investment) phase. This phase is the time period when you invest money in the annuity. You can invest in one lump sum (called a single payment annuity), or you can invest a series of payments in an annuity. The payments may be of equal size over a number of years (e.g., $5,000 per year for 10 years), or they may consist of a series of variable payments. The second phase to the life of an annuity contract is the distribution phase. There are two broad options for receiving distributions from an annuity contract. One option is to withdraw earnings (or earnings and principal) from an annuity contract. You can withdraw all of the money in the annuity (both the principal and the earnings) in one lump sum, or you can withdraw the money over a period of time through regular or irregular payments. With these withdrawal options, you continue to have control over the money that you have invested in an annuity. You can withdraw just earnings (interest) from the account, or you can withdraw both the principal and the earnings from the account. If you withdraw both the principal and the earnings from the annuity, there is obviously no guarantee that the funds in the annuity will last for your entire lifetime. A second broad withdrawal option is the guaranteed income (or annuitization) option.

Guaranteed income (annuitization) option A second broad withdrawal option for an annuity is the guaranteed income option (also called the annuitization option). If you select this option, you will receive a guaranteed income stream from the annuity. The annuity issuer promises to pay you an amount of money on a periodic basis (monthly, quarterly, yearly, etc.). You can elect to receive either a fixed amount for each payment period (called a fixed annuity payout) or a variable amount for each period (called a variable annuity payout). You can receive the income stream for your entire lifetime (no matter how long you live), or you can receive the income stream for a specific time period (10 years, for example). You can also elect to receive the annuity payments over your lifetime and the lifetime of another person (called a "joint and survivor annuity"). The amount you receive for each payment period will depend on how much money you have in the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin the annuitization phase. The length of the distribution period will also affect how much you receive. If you are 65 years old and elect to receive annuity distributions over your entire lifetime, the amount you will receive with each payment will be less than if you had elected to receive annuity distributions over 5 years.

Example(s): Over the course of 10 years, you have accumulated $300,000 in an annuity. When you reach 65 and begin your retirement, you annuitize the annuity (i.e., elect to begin receiving distributions from the annuity). You elect to receive the annuity payments over your entire lifetime--called a single life annuity. You also elect to receive a variable annuity payout whereby the annuity issuer will invest the amount of money in your annuity in a variety of investment portfolios.

The amount you will then receive with each annuity payment will vary, depending in part on the performance of the mutual funds. In the alternative, you could have elected to receive payments for a specific term of years. You could have also elected to receive a fixed annuity payout whereby you would receive an equal amount with each payment.

Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.

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Cannot outlive payments to you if you elect to annuitize for your entire lifetime One of the unique features to an annuity is that you cannot outlive the payments from the annuity issuer to you (assuming you elect to receive payments over your entire lifetime). If you elect to receive payments over your entire lifetime, the annuity issuer must make the payments to you no matter how long you live. Even if you begin receiving payments when you are 65 years old and then live to 100, the annuity issuer must make the payments to you for your entire lifetime. The downside to this ability to receive payments for your entire life is that if you die after receiving just one payment, no more payments will be made to your beneficiaries. You have essentially given up control and ownership of the principal and earnings in the annuity.

Immediate and deferred annuities There are both immediate and deferred annuities. An immediate annuity is one in which the distribution period begins immediately (or within one year) after the annuity has been purchased. For example, you sell your business for $1 million (after tax) and then retire. You purchase an immediate annuity for $1 million and begin to receive payments from the annuity issuer immediately.

A second type of annuity is a deferred annuity. With a deferred annuity, there is a time delay between when you begin investing in the annuity and when the distribution period begins. For example, you may purchase an annuity with a single payment and then not begin receiving payments for 10 years. Alternatively, you may invest a series of payments in an annuity over a period of 5 years before the distribution period begins.

Earnings tax deferred One of the attractive aspects to an annuity is that the earnings on an annuity (i.e., the interest earned on your money by the issuer) are tax deferred until you begin to receive payments back from the annuity issuer. In this respect, then, an annuity is similar to a qualified retirement plan. Over a long period of time, your investment in an annuity may grow substantially larger than if you had invested money in a comparable taxable investment.

(However, like a qualified retirement plan, there may be a 10 percent tax penalty if you begin withdrawals from an annuity before the age of 59½.)

Four parties to an annuity There are four parties to an annuity: the annuity issuer, the owner, the annuitant, and the beneficiary. The annuity issuer is the company (e.g., an insurance company) that issues the annuity. The owner is the individual who buys the annuity from the annuity issuer and makes the contributions to the annuity. The annuitant is the individual whose life will be used as the measuring life for determining the distribution benefits that will be paid out. (The owner and the annuitant are usually the same person, but they do not have to be.) Finally, the beneficiary is the person who receives a death benefit from the annuity upon the death of the contract owner.

What are some of the common uses of annuities?

Developed by insurance companies to provide retirement income Life insurance companies first developed annuities to provide income to individuals during their retirement years.

This function is in contrast to the benefits that a life insurance policy provides to your beneficiaries after your death. Although annuities were first developed to fund an annuitant's retirement years, there is no requirement that an annuity be used only for retirement purposes. In fact, annuities may be and are used to fund other financial goals, such as paying for a child's education or starting a business.

Example(s): Liz is a highly successful entrepreneur. Her business has grown far beyond what she has ever imagined, but her long hours have taken a toll on both her and her family. Liz plans to sell the company in the near future and pursue her lifelong interest in landscape painting full-time. Even though she expects a modest income from the sale of her paintings, Liz will use the sale proceeds from her company to purchase an annuity that will provide her with regular, guaranteed income for the rest of her lifetime.

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Example(s): In contrast, Sam is vice president for a small manufacturing company. Unfortunately, Sam's company does not offer a retirement plan, and he has already contributed the maximum amount to his individual retirement account (IRA). Knowing that he can and needs to save more aggressively for retirement, Sam purchases an annuity to which he will contribute regularly until he retires. He will then receive a guaranteed income stream from the annuity in addition to receiving Social Security and income from his IRA. Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.

How do annuities differ from other retirement plans?

Annuities differ from other types of retirement plans in several important ways.

Contributions are not tax deductible Unlike contributions to a qualified retirement plan, money you invest in an annuity is not tax deductible. Any money that you use to purchase an annuity will be after-tax income. (However, like a qualified retirement plan, interest and capital gains earned by an annuity will accrue tax deferred until you begin withdrawing the money from the annuity.)

Contributions are unlimited All qualified retirement plans have limitations on how much you can contribute each year. With many plans, the amount that can be contributed is quite low. However, there is no limitation on how much you can invest in an annuity. If you win a lump sum of $1 million in the lottery, you can invest the full amount (after paying the applicable income taxes, of course) in an annuity.

May receive income for life from annuity One of the unique features to an annuity is that you cannot outlive the income payments (assuming you elect to receive the payments over your entire lifetime). With some types of qualified retirement plans, you will receive payments from the plan only until all the money in the retirement account is depleted. There is the real possibility that you will outlive the money available in the account. Some qualified retirement plans do offer their beneficiaries the option to convert monies in the account into an annuity upon retirement.

Investment options The money that you use to purchase an annuity may be placed in the annuity issuer's general funds pool. The money is then invested and managed by the issuer's own money managers. Some types of annuities (called variable annuities) allow you to place your annuity funds in specific investment pools, typically called subaccounts. The funds are managed by an investment advisor. You may then be able to move your annuity investments between stocks, bonds, money markets, or other types of investments.

Caution: Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk including the possibility of loss of principal.

Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

What are the advantages to annuities?

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Earnings accrue tax deferred As noted, one of the main advantages to an annuity is that the interest generated by an annuity accrue tax deferred. Over a long period of time, this deferral of taxes on earnings is an advantage for an annuity over a comparable taxable investment.

Guaranteed payments for life Another advantage to an annuity is that you can receive payments from the annuity for your entire lifetime. As long as you elect to receive payments over your entire lifetime when the payout period begins, you will receive the payments for as long as you are alive. Even if you live to the age of 100, the annuity issuer must make the payments to you.

No contribution limits Unlike qualified retirement plans, there is no limit on how much you can invest in an annuity.

Many different types of annuities available In recent years, there has been a huge increase in the number and variety of annuities available in the marketplace. There are numerous fixed annuities, variable annuities, and equity-indexed annuities that an individual can choose.

Can delay payout until later age With most qualified retirement plans, you must begin taking money out of the plan by a certain age (usually 70½).

With an annuity, there is no age limit at which you must begin receiving payments from the annuity. If you do not need the money from the annuity, you can continue to have the earnings accrue tax deferred.

Proceeds avoid probate If you die before the distribution period begins, then the money you have invested in the annuity (plus any accrued interest or earnings) does not have to be included in your probate estate if you have named a beneficiary on the annuity. The money in your annuity will pass directly to that named beneficiary. Because of the potential delays and costs in having your assets pass through probate, most estate planners recommend that you try to avoid having assets pass through probate.

What are the tradeoffs to an annuity?

Costly fees and expenses Annuities normally entail higher fees and expenses when compared to other types of investments, such as mutual funds and bank deposits.

May have high surrender charges Many annuities have high "back-end" surrender charges if you withdraw your money from the annuity within the first few years. In many instances, the surrender charge may be 8 percent of any money you withdraw in the first year, then 7 percent of any money you withdraw in the second year, and continuing down to zero by the ninth year.

Contributions not tax deductible Another disadvantage to an annuity (in comparison to certain qualified retirement plans) is that investments in an annuity are not tax deductible. You must use after-tax dollars to purchase an annuity. This is why it is normally best to place the maximum amount of funds in vehicles that allow for pretax contributions first.

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Tax penalties for early withdrawals Another concern when purchasing annuities is that the tax code imposes a 10 percent penalty tax (in addition to any other taxes owed on the payments) on withdrawals of any earnings from an annuity before you reach the age of 59½. There are certain exceptions to the imposition of this penalty, but in most cases you will have to pay an additional tax penalty if you withdraw earnings from the annuity before you reach the cut-off age.

Payout plan is irrevocable once selected Once you elect a specific distribution plan, annuitize the annuity, and begin receiving payments, then that election is usually irrevocable. For example, you are not allowed to change an election to receive annuity payments for a five-year period to an election to receive payments over your whole life.

Income from fixed annuity may not keep up with inflation Another tradeoff with certain types of annuities (specifically fixed annuities) is that the income from the annuity may not keep pace with inflation over the long term. Variable and equity-indexed annuities have been increasing in popularity since their investment options may offer inflation protection and growth.

Must rely on financial strength of annuity issuer With certain types of annuities, specifically fixed but also some variable subaccounts, the money you invest in the annuity becomes part of the general funds of the annuity issuer. The annuity issuer then manages your money, its money, and other people's money as one unit. If the annuity issuer has financial problems, your payments (or the amount of your payments) may be in trouble. Unlike bank deposits at federally insured financial institutions, there are no federal guarantees on the money you invest in an annuity and only limited state provisions in the event of insolvency of the insurer. You are relying solely on the financial strength of the annuity issuer to repay your investment. For this reason, you should purchase an annuity only from an insurance company (or other annuity issuer) that has high financial ratings.

Why contribute to qualified retirement plans first?

Maximize contributions to qualified retirement plans first If you are eligible to contribute to a qualified retirement plan either through your employer or if you are self-employed, it usually makes sense to contribute the maximum amount to one of these plans before you purchase an annuity. The primary reason for this fact is that contributions to qualified retirement plans are tax deductible (up to certain limits), whereas contributions to an annuity must be made with after-tax money. Of course, with both qualified retirement plans and annuities, the money invested accrues tax deferred until you begin withdrawals.

Why shop around for annuities?

Costs and returns may vary for annuities Annuities tend to be more costly (in terms of fees, surrender charges, and other costs) than other types of investments, primarily because the annuity issuer provides additional benefits to you. Annuity issuers must therefore charge higher fees to cover the cost of these additional benefits. Furthermore, the returns that issuers pay on annuities can vary dramatically from one company to the next. Because new variations of annuities are constantly being introduced in the marketplace and because the financial services industry has become increasingly competitive, it can pay to shop around when buying annuities.

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Saving for College and Retirement What is it?

These days it's not uncommon for parents to postpone starting a family until both spouses are settled in their marriage and careers, often well into their 30s and 40s. Though this financial security can be an advantage, it can also present a dilemma--the need to save for college and retirement at the same time.

The prevailing wisdom has parents saving for both goals at the same time. The reason is that older parents can't afford to put off saving for retirement until the college years are over, because to do so means missing out on years of tax-deferred growth. Moreover, because generous corporate pensions (and lifetime job security) are now the exception rather than the rule, employees must take greater responsibility for funding their own retirements.

First, determine your monetary needs The first step is to determine your projected monetary needs, both for retirement and college. This analysis will reveal whether you are on a savings course to meet both goals, or whether some modifications will be necessary.

For information on figuring your income needs in retirement, see Determining Your Retirement Income Needs: Pre-Retirement.

For information on estimating college expenses, see Estimating College Costs.

You've come up short: what are your options?

You've run the numbers on both your anticipated retirement and college expenses, and you've come up short.

The numbers say you won't be able to afford to educate your children and retire with the lifestyle you expected based on your current earnings. Now what? It's time to sit down and make some tough decisions about your expectations and, ultimately, how to compromise.

The following options can help you in that effort. Some parents may need to combine more than one strategy to meet their goals.

Defer retirement Staying in the workforce longer is one way of meeting your retirement and education goals. The longer you wait to dip into your retirement funds, the longer the money will last. For more information, see Delayed Retirement Considerations.

Reduce standard of living now or in retirement You may be able to adjust your spending habits now in order to have more money later. Consider making a written budget to track your monthly income and expenses (see Budgeting for more information). If your monetary needs have fallen far short of the mark, you will need to make a bigger spending adjustment than you would with a lesser shortfall. The following are some suggested changes: • Move to a less-expensive home or apartment • Sell your second car and carpool whenever possible • Reduce your entertainment budget (e.g., bring your lunch to work, eat out once a month instead of every week, rent movies instead of going to the cinema)

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• Get books and magazines from the library instead of the bookstore • Cancel any club memberships (e.g., golf club, health club) • Set a limit on birthday and holiday gifts for family members • Forgo expensive vacations • Shop for clothes in the off-season, when they're likely to be on sale • Buy used furniture and used big-ticket items • Limit your child's extracurricular activities, like music lessons or hockey camp If you're unable or unwilling to lower your standard of living now, perhaps you can lower it in retirement. This may mean revising your expectations about a luxurious, vacation-filled retirement. The key is to recognize the difference between the things you want and the things you need. The following are a few suggestions to help reduce your standard of living in retirement: • Reduce your housing expectations • Cut back on travel plans • Own a less-expensive automobile • Lower household expenses Note: There's a difference between reducing your standard of living in retirement and drastically reducing your standard of living in retirement. Most professionals discourage the use of retirement funds for your child's education if paying college bills will leave you high and dry in your retirement years.

Work part-time during retirement About 25 percent of retirees work part-time. You may find that the extra income enables you to enjoy the kind of retirement you had anticipated.

Increase earnings (i.e., spouse returns to work) Increasing earnings may be another way to meet both your education and retirement goals. The usual scenario is that a stay-at-home spouse returns to the workforce. This has the benefit of increasing the family's earnings so there's more money available to save for education and/or retirement. However, there are drawbacks. The additional income may push the family into a higher tax bracket (see Second-Income Analysis), and incidental expenses like day care and commuting costs may eat into your overall take-home pay. For more information on the pros and cons of a spouse returning to work, see Spouse Returns to or Increases Hours at Work.

In addition to a spouse returning to work, one spouse may decide to increase his or her hours at work, take another job with better compensation, or moonlight at a second job. Factors to consider here include the expectation of increased job pressure, less availability for child rearing and household management, the amount of extra income, the opportunity for advancement, and job security. Another way to create extra income is for a spouse to turn a hobby into a business.

Be more aggressive in investments Your analysis has shown that your current savings (and the accompanying investment vehicles) will leave you short of your education and retirement goals. One option is to try to earn a greater rate of return on your savings.

This may mean choosing more aggressive investments (e.g., growth stocks) over more conservative investments (e.g., bonds, certificates of deposit, savings accounts). This strategy works best the more years you have until retirement.

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Caution: The more aggressive the investment, the greater the risk of loss of your principal. This strategy isn't for people who shudder at the slightest downturn in the stock market. If you'll have trouble sleeping at night, you probably shouldn't take on greater risk in your investment portfolio.

Reduce education goal One of the realities parents may have to face is that they can't afford to fund 100 percent (or 75 percent, or 50 percent, as the case may be) of their child's college education. This is often an emotional issue. Parents naturally want the best for their children. For many parents, this translates into sending them to (and paying for) college (especially in cases where one or both parents didn't have such an opportunity).

You may have dreamed that your child would go to a prestigious Ivy League school. Well, with a year's cost at such a school hovering at the $40,000 mark, maybe you need to lower your expectations. That small liberal arts college or the big state school may challenge your child just as much and at a far lower cost. Remember, there are loans available for college, but none for retirement.

Children pay more and/or assume more responsibility for loans With college costs continuing to increase at a rate faster than most family incomes (see Estimating College Costs), and with perhaps more than one child in the family picture, chances are that more responsibility will fall on your child to help fund college costs. This money can come from part-time jobs or gifts, though the majority of your child's contribution is likely to come from student loans. For more information on student loans, see Financial Aid: Loans.

Though student loans can be a financial burden in the early years, when graduates are just starting out in their careers, many loan providers offer flexible repayment options in anticipation of this common situation (see Repaying Student Loans). In addition, if your child meets certain income limits, he or she can deduct the interest paid on qualified student loans (see Student Loan Interest Deduction for more information).

When children take out student loans, parents can always decide to help financially rather than mortgaging their house before college. Students who take out student loans to pay for college may have a more vested interest in their education than students who receive help from their parents.

Other ways to lower cost of college In addition to reducing your education goal and having your child pay a portion of college costs, there are other ways to lower the cost of college. For example, your child can choose a college with an accelerated program that allows students to graduate in three years instead of four. Likewise, your child may choose to attend a community college for two years and then transfer to a four-year private institution. The diploma will reflect the four-year college, but your pocketbook won't. For more ideas on ways to lower the cost of college, see Implementing Other Creative Solutions to Cover Higher Education Costs.

How do you decide what strategy is best for you?

This decision must be made on a case-by-case basis. What works for one family may not work for another family.

In some cases, more than one strategy will be necessary to deal with the demands of educating children and retiring successfully. Factors influencing your decision may include the following: • The amount of your financial need • Your current income and assets and any expectation of significant future income (e.g., a bonus at work, exercise of stock options, an inheritance) • The number of years you have until retirement • Your willingness to reduce your standard of living (now or in the future) for the sake of your children • The number of children in your family who plan on attending college

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• The academic, athletic, or other notable skills of your child that may raise the possibility of a college scholarship

Can retirement accounts be used to save for college?

Yes. But should you? Probably not. Many financial advisors recommend against dipping into your retirement account to pay college expenses as a preferred strategy. But if you must, there are some tax breaks available.

It's now possible to withdraw money from either a traditional IRA or Roth IRA before age 59½ to pay college expenses without incurring the 10 percent early withdrawal penalty that normally applies to such withdrawals.

However, any distributions of earnings and deductible contributions from a traditional IRA and any nonqualified distributions of earnings from a Roth IRA may be included in your income for the year, which may push you into a higher tax bracket. For more information, see Traditional IRAs and Roth IRAs. Tip: This college exception to the 10 percent early withdrawal penalty is a good reason to funnel your child's income from a part-time job into an IRA. Unfortunately, there's no similar college exception for employer-sponsored retirement plans, such as a 401(k) plan. So, if you're under age 59½, you'll pay a 10 percent early withdrawal penalty on any withdrawals. As with an IRA, any withdrawals are added into your income for the year, which may push you into a higher tax bracket.

Nevertheless, saving in a 401(k) plan can be an attractive option for some parents because the company may match employee contributions and because most employer plans allow you to borrow against your contributions (and possibly earnings) before age 59½ without penalty. For more information, see Employer-Sponsored Retirement Plans for Education Savings.

Tip: Some parents who have built a college fund within their 401(k) accounts, but who are not yet 59½ when the kids are in college, take out what's called a bridge loan (such as a home equity loan) to pay their child's college bills. A bridge loan is a source of funds that tides you over until it's more economical to tap your retirement account. Although you pay interest on a bridge loan, it may still cost less than what your 401(k) funds can earn. Then, when you turn 59½, you can start tapping your 401(k) plan to pay off the bridge loan with no early withdrawal penalty.

A benefit of using retirement accounts to save for college is that the federal government doesn't consider the value of your retirement accounts in awarding financial aid (the federal formula also excludes annuities, cash value life insurance, and home equity from consideration). However, most private colleges do consider the value of your retirement accounts in deciding which students are the most deserving of campus-based aid. See Applying for Financial Aid for more information.

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Distributions from Traditional IRAs: Prior to Age 59½ In general A withdrawal from an IRA is generally referred to as a distribution. If you receive a distribution from your traditional IRA before you reach the age of 59½, the federal government considers this a premature distribution.

Like all distributions from traditional IRAs, premature distributions are generally taxable. You will pay federal (and possibly state) income tax on the portion of the distribution that represents tax-deductible contributions, any pre-tax funds that were rolled over into the IRA from an employer-sponsored retirement plan, and investment earnings. In addition to regular income tax, distributions taken prior to age 59½ may be subject to a 10 percent federal penalty tax (and possibly a state penalty) on the taxable portion of the distribution. You can avoid this federal penalty (known as the premature distribution tax) only if you are age 59½ or older at the time of the distribution, or if you meet one of the exceptions allowed by the IRS (see below).

You're probably wondering why your age at the time of distribution should matter and possibly result in a penalty on the distribution. The purpose of IRAs and retirement plans is to provide income to help fund your retirement years, and the federal government wants to make sure you use the money for that purpose. To accomplish this goal, the government imposes a penalty tax on taxable distributions taken before age 59½. The penalty tax encourages you (and other IRA owners and plan participants) to leave your money in the IRA or plan until that age or later. This, in turn, reduces the risk that you will deplete your funds prematurely and run out of money at some point in retirement. The assumption is that by the time you reach age 59½, you are either already retired or near retirement and can safely begin using your retirement money.

Caution: This discussion pertains primarily to distributions from traditional IRAs. Qualified distributions from Roth IRAs are tax-free. Even Roth IRA distributions that don't qualify for tax-free treatment are tax free to the extent of your own contributions to the Roth IRA. Only after you've recovered all of your contributions are distributions considered to consist of taxable earnings.

Further, special rules apply to distributions taken from Roth IRAs that have funds rolled over or converted from traditional IRAs. Caution: Special rules apply to distributions to qualified individuals impacted by certain natural disasters and to qualified reservist distributions.

Example showing the effect of taxes and penalties Income taxes on IRA and retirement plan distributions can really add up. When a distribution is also subject to the 10 percent federal penalty, the portion of the distribution that goes into your pocket obviously dwindles even further. To illustrate the possible effect of taking a distribution before age 59½, consider the following scenario.

Example(s): Joe retired on his 59th birthday. On that day, he withdrew the entire balance in his traditional IRA valued at $100,000. The entire distribution was taxable. Because Joe also had considerable income from working that year, the IRA distribution was taxed in the maximum 35 percent federal income tax bracket. That came to $35,000 in federal income tax (assuming no other variables). Joe was in the 9.3 percent state income tax bracket, so that meant another $9,300 in state income tax. Since Joe was under age 59½ and no exception to the premature distribution tax applied to him, he had to pay $10,000 in federal penalties (the 10 percent federal penalty tax), plus another $2,500 in state penalties (due to a 2.5 percent state penalty). He ended up paying $56,800 in taxes and penalties, leaving only $43,200 for his own use.

Example(s): If Joe had waited until he was 59½ or older to take his distribution, he would have avoided the federal and state penalties and saved $12,500. Also, if he had waited two months until the next year (when he had no taxable income from working), the distribution might have been taxed in a lower income tax bracket. It would definitely have paid for Joe to get tax advice before taking that distribution from his traditional IRA. See disclaimer on final page March 28, 2010

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Example(s): Of course, if Joe had ever made any nondeductible contributions to his traditional IRA, the portion of his distribution that represented nondeductible contributions would not have been taxable because those contributions had already been subject to tax. That portion of his distribution would not have been subject to the 10 percent federal penalty either, since the penalty applies only to the taxable portion of a premature distribution.

If you are close to age 59½ and wish to take a distribution from your traditional IRA, check the calendar carefully to avoid a potentially costly mistake.

Exceptions to the premature distribution tax Remember, only the taxable portion of a premature distribution is subject to the 10 percent federal penalty. This means that if you ever made any nondeductible (after-tax) contributions to your traditional IRA, a portion of your distribution may not be subject to tax or penalty. In addition, the IRS grants certain exceptions to the 10 percent federal penalty on distributions taken before age 59½. Premature distributions taken from a traditional IRA under the following circumstances will not be subject to the penalty: • Your beneficiary (or estate) is receiving the funds after your death, regardless of your beneficiary's age or your age at the time of your death • You are receiving the funds due to your qualifying disability (IRS definition of disability must be met) • You are taking the distributions under one of the three annuity formulas approved by the IRS (often referred to as substantially equal periodic payments) • You are paying unreimbursed medical expenses in excess of 7.5 percent of your adjusted gross income (AGI) for the year • You are paying health insurance premiums for you, your spouse, or your dependents during a year in which you collected unemployment benefits for more than 12 consecutive weeks • You make a qualifying, nontaxable rollover (or direct transfer) • You are using the funds for the qualified higher education expenses of yourself, your spouse, your children, your spouse's children, your grandchildren, or your spouse's grandchildren • You are using the funds to pay the first-time homebuyer expenses of yourself, your spouse, your children, your grandchildren, or an ancestor of your spouse or you ($10,000 lifetime limit) • The IRS is levying on your IRA to cover your unpaid federal income tax liability • Your distribution is a qualified reservist distribution Some of the above exceptions may need further explanation. If so, see our separate topic discussion, Premature Distribution Rule. You should also consult a tax advisor regarding your situation to make sure which exceptions (if any) you qualify for. Finally, if you participate in an employer-sponsored retirement plan, be aware that different exceptions to the premature distribution tax may apply.

How do you pay the premature distribution tax?

The 10 percent federal penalty on premature distributions is reported and paid on your federal income tax return for the year in which you received the distribution. You must complete and attach Form 5329, titled Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. If you receive a premature distribution but qualify for one of the exceptions described above, see Form 5329 for instructions.

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Should you take distributions from your traditional IRA before age 59½?

You are allowed to take distributions from your traditional IRA whenever you like and in any amount you choose.

That does not mean, however, that you should take distributions. As a general rule, it is not advisable to take distributions from a traditional IRA before age 59½ (or for that matter, at any age prior to your retirement). First, as illustrated above, the portion of the distribution that goes to the federal government for taxes can be substantial--not to mention state taxes and penalties. This is especially true if the entire distribution will be taxable, and if none of the exceptions to the premature distribution tax apply to you.

In addition, even if all or some of the distribution will not be taxed or penalized, taking IRA distributions before age 59½ is still generally not wise. By dipping into your IRA funds at a relatively young age, you run the risk of depleting those funds sooner than you had anticipated. This could jeopardize your retirement goals and financial security later in life. Funds removed from an IRA may also be missing out on several years or more of potential tax-deferred growth, depending on investment performance.

However, the decision of whether to tap into your IRA nest egg ultimately depends on your individual circumstances. Perhaps you have urgent expenses, and withdrawing from your IRA is the only way you can pay them. It is also possible that you have accumulated large balances in your IRAs and other retirement accounts, so that withdrawing from your IRAs now will not pose a risk to your future financial security. In these cases, taking distributions before age 59½ is not necessarily ill-advised. Whatever your situation, though, you should consult a tax professional before taking a distribution.

IRA rollovers In general, a rollover is the movement of funds from one retirement savings vehicle to another--in this case, from one traditional IRA to another. Rollovers are treated separately from contributions; you are still allowed to make your regular IRA contribution in a year when you have a rollover transaction. There are no age restrictions regarding rollovers, but there are other specific rules that must be followed. For example, a rollover generally must be completed within 60 days of the date the funds are released from the distributing account. If properly completed, rollovers are not subject to income tax or the premature distribution tax. There are two possible ways that IRA funds can be rolled over.

Tip: You can roll over funds from a traditional IRA to another traditional IRA or you can rollover funds from a Roth IRA to another Roth IRA. Special rules apply to converting or rolling over funds from a traditional IRA to a Roth IRA. See "Converting or rolling over traditional IRAs to Roth IRAs," below. You may also be able to roll over taxable funds from an IRA to an employer-sponsored retirement plan.

You receive the funds and reinvest them With this method, you actually receive a distribution from your traditional IRA. To complete the rollover transaction, you make a deposit into the IRA that you want to receive the funds. You are allowed to do this only once in a 12-month period. If you receive a second distribution from the same IRA within a 12-month period, you cannot roll it over (you also can't make a rollover from the IRA you roll the funds into for 12 months). Also, you must deposit the full amount distributed to you within the allowable 60-day period. If you fail to complete the rollover or miss the 60-day deadline, all or part of your distribution will be subject to income tax and possibly the premature distribution tax.

Example(s): On January 2, you withdraw your IRA funds from a maturing bank CD. The bank cuts a check payable to you for the full balance of the account (assuming you opt for no income tax withholding). You plan to move the funds into an IRA account at a competing bank. Fifteen days later, you go to the new bank and deposit the full amount of your IRA distribution into your new rollover IRA. Your rollover is complete.

Example(s): Now assume the same scenario as above, except that when you receive your check from the first bank, you cash the check and lend the money to your brother, who promises to repay

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you in 30 days. As it turns out, he doesn't repay the loan until March 5 (the 62nd day after your distribution). You deposit the full sum into the IRA account at the new bank. However, because you didn't complete your rollover within 60 days, the January 2 distribution will be taxable (excluding any nondeductible contributions, as described above) and possibly subject to the premature distribution tax.

When you take a distribution from your traditional IRA, your IRA trustee or custodian will generally withhold 10 percent for federal income tax (and possibly additional amounts for state tax and penalties) unless you instruct them not to. If tax is withheld and you then wish to roll over the distribution, you have to make up the amount withheld out of your own pocket. Otherwise, the rollover is not considered complete, and the shortfall is treated as a taxable distribution. The best way to avoid this outcome is to instruct your IRA trustee or custodian not to withhold any tax. Unlike distributions from qualified plans, IRA distributions are not subject to a mandatory withholding requirement.

Example(s): You take a $1,000 distribution (all of which would be taxable) from your traditional IRA that you want to roll over into a new IRA. You fail to tell your IRA trustee not to withhold any tax, so $100 is withheld for federal income tax and you actually receive only $900. If you roll over only the $900, you are treated as having received a $100 taxable distribution. To roll over the entire $1,000, you will have to deposit in the new IRA the $900 that you actually received, plus an additional $100.

(The $100 withheld will be claimed as part of your credit for federal income tax withheld on your federal income tax return.)

Tip: The IRS can extend the 60-day period, in limited circumstances, when the failure to timely complete the rollover is not the taxpayer's fault.

Trustee-to-trustee transfer The second type of rollover transaction occurs directly between the trustee or custodian of your old traditional IRA, and the trustee or custodian of your new traditional IRA. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution (and therefore, the issue of tax withholding does not apply). Trustee-to-trustee transfers avoid the danger of missing the 60-day deadline, and are not subject to the "once per 12 month" limitation.

Example(s): You have a traditional IRA invested in a bank CD with a maturity date of January 2. In December, you provide your bank with instructions to close your CD on the maturity date and transfer the funds to another bank that is paying a higher CD rate. On January 2, your bank issues a check payable to the new bank (as trustee for your IRA) and sends it to the new bank. The new bank deposits the IRA check into your new CD account, and your trustee-to-trustee transfer is complete.

This is generally the safest, most efficient way to move IRA funds. Taking a distribution yourself and rolling it over only makes sense if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.

Converting or rolling over traditional IRAs to Roth IRAs Have you done a comparison and decided that a Roth IRA is a better savings tool for you than a traditional IRA? If so, you may be able to convert or roll over an existing traditional IRA to a Roth IRA. However, be aware that you will have to pay income tax on all or part of the traditional IRA funds that you move to a Roth IRA. It is important to weigh these tax consequences against the perceived advantages of the Roth IRA. This is a complicated decision, so be sure to seek professional assistance.

Tip: When you convert or roll over a traditional IRA to a Roth IRA prior to age 59½, the taxable portion of the funds is not subject to the premature distribution tax. However, special rules may apply if you withdraw from the Roth IRA within five years of the conversion or rollover. For more information, consult a tax advisor.

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Beneficiary Designations for Traditional IRAs and Retirement Plans What is it?

If you have a traditional IRA or participate in an employer-sponsored retirement plan such as a 401(k) plan, you are generally required to complete a beneficiary designation form with the IRA custodian or plan administrator. As you may know, the beneficiary or beneficiaries you name (you can generally name more than one) will receive the remaining funds in your IRA or plan account after you die. What you may not realize is that your choice of beneficiary may have implications in other important areas, including: • The size of the annual required minimum distributions (RMDs) that you must take from the IRA or plan during your lifetime • The rate at which the funds must be distributed from the IRA or plan after your death • The combined federal estate tax liability of you and your spouse (assuming you are married and expect estate tax to be an issue for one or both of you) Because of these and other issues, choosing beneficiaries for your IRA or plan is often a significant financial decision. This is particularly true if your financial situation is complicated, and if your retirement accounts make up a substantial portion of your total assets. It is in your best interest to select proper beneficiaries with the help of a tax advisor and/or other qualified professionals. Your financial and personal circumstances will likely evolve over time, and you are often free to add or remove beneficiaries whenever you want (though certain restrictions may apply, as discussed below). You should periodically review your beneficiary choices to make sure they are still the right choices.

Tip: Employer-sponsored retirement plans include qualified stock bonus, pension, or profit-sharing plans. A 401(k) plan is a type of employer-sponsored retirement plan. If you are unsure if you participate in an employer-sponsored retirement plan, ask your employer. This discussion also applies to you if you are a schoolteacher or an employee of a tax-exempt organization or state or municipal government and participate in an eligible Section 457 plan or a Section 403(b) plan.

Caution: This discussion does not apply to Roth IRAs. Roth IRAs have their own special beneficiary designation considerations.

The law may limit your choices You are often free to name any beneficiaries you choose for your IRA or plan, but there are exceptions. If you are married and want to name a primary beneficiary other than your spouse, there may be restrictions on your ability to do so. No matter which state you live in, federal law may require that your surviving spouse be the primary beneficiary of your interest in some employer-sponsored retirement plans (such as 401(k) plans), unless your spouse signs a timely, effective written waiver allowing you to name a different primary beneficiary. You should consult your plan administrator for further details.

IRAs are not subject to this federal law, although your state may impose its own requirements. For example, if you live in one of the community property states, your spouse may have legal rights in your IRA regardless of whether he or she is named as the primary beneficiary. In addition, if your roles are reversed (your spouse is the IRA owner or plan participant, and you the primary beneficiary) and you die first, state law may prevent your surviving spouse from changing the beneficiary designation after your death (unless you grant your spouse the power to make these changes in a will or other document). You should consult an estate planning attorney for details regarding these and other state issues.

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Your choice of beneficiary usually will not affect required minimum distributions during your lifetime Under federal law, you must begin taking annual RMDs from your traditional IRA and most employer-sponsored retirement plans (including 401(k)s, 403(b)s, 457(b)s, SEPs, and SIMPLE plans) by April 1 of the calendar year following the calendar year in which you reach age 70½ (your "required beginning date"). With employer-sponsored retirement plans, you can delay your first distribution from your current employer's plan until April 1 of the calendar year following the calendar year in which you retire if (1) you retire after age 70½, (2) you are still participating in the employer's plan, and (3) you own five percent or less of the employer.

Your choice of beneficiary will not have an impact on the calculation of RMDs during your lifetime in most cases.

An exception exists if your spouse is your sole designated beneficiary for the entire distribution year, and he or she is more than 10 years younger than you. Also, your choice of beneficiary can impact the tax deferral and other consequences for your beneficiaries.

Caution: The calculation of RMDs is complex, as are the related tax and estate planning issues.

Consult a tax professional.

Caution: The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.

Your choice of beneficiary will affect required distributions after your death After your death, your IRA or plan beneficiary (or beneficiaries) will generally have to receive the inherited retirement funds at some point. Distributions from an inherited IRA or retirement plan are referred to as required post-death distributions. With some exceptions, these distributions must begin by the end of the year following the year of your death.

Caution: The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.

For federal income tax purposes, post-death distributions are treated the same as distributions you take during your lifetime. (State income tax may also apply.) The portion of a distribution that represents pretax or tax deductible contributions and investment earnings will be subject to tax, while the portion that represents after-tax contributions will not be. Your beneficiary's income tax bracket will determine how heavily the funds are taxed after your death. This may be something to consider when choosing your beneficiaries.

In addition, different types of beneficiaries will have different post-death options and be subject to different payout periods. The payout period is important because the longer the funds can remain in the IRA or plan, the more time they have to benefit from tax-deferred growth. Also, a longer payout period spreads out the income tax liability on the funds over more years. In most cases, an individual designated as a beneficiary can take post-death distributions over his or her remaining life expectancy. The younger the individual, the longer the payout period. A surviving spouse can generally use this method, but often has other options as well (such as the ability to roll over the inherited funds to the spouse's own IRA or plan). Special post-death rules apply if you name a trust, a charity, or your estate as beneficiary.

Caution: Nonspouse beneficiaries cannot roll over inherited funds to their own IRA or plan.

However, the Pension Protection Act of 2006 lets a nonspouse beneficiary make a direct rollover of certain death benefits from an employer-sponsored retirement plan to an inherited IRA (traditional or Roth), effective for distributions received after 2006. However, employer plans aren't required to offer this rollover option to nonspouse beneficiaries until 2010.

Be aware that your beneficiaries will be subject to a federal penalty tax if required post-death distributions are not taken, or not taken in a timely manner. The penalty tax is equal to 50 percent of the undistributed required amount for a given year. This is the same penalty tax that applies when lifetime RMDs (see above) are not taken by the applicable deadline.

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Finally, the important point is that who or what you name as your beneficiary is crucial because it will ultimately determine how the funds are paid out after you die, and what portion is lost to taxes. Estate taxes may also be a factor to consider if you expect the value of your estate and/or your spouse's estate to exceed the federal applicable exclusion amount ($3.5 million for 2009, $2 million for 2008).

Caution: In the case of a retirement plan account, the plan may be able to specify the post-death distribution options available to your beneficiaries. Those options may or may not be identical to the allowable options set forth in the IRS distribution rules. You should consult your plan administrator for details, as this could have an impact on your choice of beneficiaries.

Other considerations when choosing beneficiaries Income and estate taxes are very important considerations when choosing IRA and plan beneficiaries, but they are not the only factors that should enter into your decision. Never forget that, ultimately, you are deciding who will receive your IRA or retirement plan benefits after you die. Think carefully about who you want to provide for, and about how this decision fits into your overall estate plan. Consider the value of your IRA or retirement plan in relation to the value of all of your other assets. Designating the beneficiary of a $20,000 IRA that makes up five percent of your total assets is very different from designating the beneficiary of an $800,000 retirement plan that makes up 80 percent of your total assets. In the first situation, your decision impacts only a small portion of your total estate. In the second situation, your retirement plan is the bulk of your estate.

Designated beneficiaries vs. named beneficiaries Designated beneficiaries get preferential income tax treatment after your death. Being a "designated" beneficiary is not necessarily the same as being named as a beneficiary on a beneficiary designation form. IRAs and retirement plan accounts may have beneficiaries, but no designated beneficiaries. Designated beneficiaries are individuals (human beings) who are named as beneficiaries, do not share the IRA or plan account with nonindividuals, and are named in a timely manner. Charities and/or your estate can be named as beneficiaries, but they are not designated beneficiaries. A trust named as a beneficiary is not a designated beneficiary either, although the underlying beneficiaries of the trust can be designated beneficiaries under certain conditions.

The distinction between a designated beneficiary and a named beneficiary is important because designated beneficiaries generally have more flexible post-death distribution options, often resulting in more favorable income tax treatment. For example, only a designated beneficiary can use the life expectancy payout method for post-death distributions.

What happens if you have named both an individual and a non-individual (for example, a charity) as beneficiaries of your IRA or plan? Is the individual beneficiary allowed to use the life expectancy method to distribute his or her share? The answer is maybe. It depends on whether certain rules are followed. If you have left your IRA or plan to the beneficiaries in fractional amounts (as opposed to dollar amounts), the account may be divided into separate accounts up until December 31 of the calendar year following the year of your death. Then, the individual beneficiary can use his or her own life expectancy for his or her separate account. Or, the benefits due to the non-individual beneficiary can simply be paid out before September 30 of the calendar year following the year of your death. If the non-individual beneficiary has been fully paid off by the date indicated above, it is no longer considered a beneficiary for distribution purposes. (This approach can be used whether the non-individual beneficiary's share is expressed as a fractional amount or a dollar amount, but the separate accounts rules generally won't apply to pecuniary (specific dollar amount) bequests.)

Caution: If separate accounts are not established by December 31 of the year following the year of your death, or benefits are not paid to the non-individual before September 30 of the year following the year of your death, then your entire account will generally be treated as if there were no designated beneficiary.

Caution: The rules regarding separate accounts are complex. Consult a tax professional.

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Primary and secondary beneficiaries When it comes to beneficiary designation forms, your goal should be to avoid gaps. If you do not have a named beneficiary who survives you, your estate may end up as the "default" beneficiary of your IRA or plan. That typically produces the worst possible result in terms of estate and income taxes and other issues.

Your primary beneficiary is your first choice to receive your retirement assets after you die. You can name more than one person or entity as your primary beneficiary (see below--Having multiple beneficiaries). If your primary beneficiary does not survive you or decides to decline the inherited funds (the tax term for this is a "disclaimer"), then your secondary beneficiaries (also called "contingent" beneficiaries) receive the assets. Typically, the beneficiary designation form that you complete will have separate sections for the different levels of beneficiaries.

Having multiple beneficiaries You may generally name more than one primary beneficiary to share in the IRA or retirement plan proceeds. You just need to specify (on the beneficiary designation form) the portion of the funds that you want each beneficiary to receive. This can be expressed as fractional amounts (i.e., percentages) or as fixed dollar amounts. Fractional or percentage amounts usually make more sense, since the dollar value of the account usually fluctuates with the underlying investments and the separate account rules (discussed below) generally won't apply to pecuniary (specific dollar amount) bequests. The account does not have to be divided equally among multiple beneficiaries.

For example, you can leave 60 percent to one of your primary beneficiaries, and 20 percent each to your other two primary beneficiaries.

In addition, you can designate multiple beneficiaries by name or by a grouping. For example, you might want to name your spouse as your primary beneficiary and your children as the secondary beneficiaries. You can do this by providing the full name of each person, or by listing them simply as "my spouse who survives me" and "my children who survive me."

In some cases, you may want to designate a different beneficiary for each of your retirement accounts (assuming you have more than one), or divide an account into separate subaccounts (with a separate beneficiary for each subaccount). This could potentially allow each beneficiary to use his or her own life expectancy to calculate required post-death distributions, providing greater income tax deferral for your beneficiaries in many cases. If you do this, however, you should try to plan withdrawals from the different accounts accordingly. Taking most of your distributions from one IRA or plan account could leave the beneficiary of that account with less money than you had intended.

If you have more than one beneficiary you want to provide for, the advantage of having one retirement account (or as few as possible) with multiple primary beneficiaries is reduced paperwork and record keeping. Account consolidation may also save you money in annual fees and other expenses. The drawback is that this may limit post-death options. For example, say your children are all named as primary beneficiaries of your one IRA, and they want to use the life expectancy method for post-death distributions. The calculation would generally have to be based on the age of the oldest child, subjecting the other children to a shorter payout period than they could otherwise have.

This outcome can be avoided, however, if separate accounts are established for the children at some point. An IRA or plan account with multiple designated beneficiaries can generally be split into separate accounts at any time up until December 31 of the year following the year of your death (but note that designated beneficiaries are determined by September 30). Each account and its beneficiary might then be treated separately for purposes of determining required post-death distributions.

Caution: The rules regarding "separate accounts" are complicated. Consult a tax professional.

When do you have to choose your beneficiaries?

In the past, you typically had to choose a beneficiary for your IRA or retirement plan by your required beginning

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date for lifetime RMDs. Your choice was then "locked in" (at least for certain purposes) on the earlier of that date or the date of your death. The final IRS regulations issued in 2002 extend the deadline for finalizing your beneficiary choices for purposes of post-death distributions until September 30 of the year following your death.

This gives you greater flexibility because you are now free to change beneficiaries any time during your life.

Changes made after your required beginning date usually will not affect the distributions you are taking (since your choice of beneficiary, unless it is a more than 10 years younger spouse, now has no bearing on the calculation of your RMDs during your lifetime).

The final regulation distribution rules also create significant opportunities for post-death planning. Since your IRA or plan beneficiaries are not finalized until September 30 of the year following your death, a beneficiary could either disclaim (refuse to accept) or cash out (withdraw) his or her share of the inherited funds by this deadline.

That beneficiary would then be removed from the list of designated beneficiaries. Only those beneficiaries remaining as of the September 30 deadline would be considered when determining required post-death distributions from the account.

Caution: Although the date for finalizing beneficiaries for distribution purposes is September 30 of the year following your death, an IRA or plan account can be split into separate accounts up until December 31 of that same year. Again, consult a tax professional regarding the rules for separate accounts.

Paying death taxes on IRA and plan benefits Consult your estate planner as to the source to pay any death taxes due on your IRA and retirement plan benefits. Depending on the death tax payment clause in your will and/or trust and state law, it could be that other assets are used to pay death taxes, or it might be that the benefits will be diminished by the payment of death taxes. An important part of completing your beneficiary designations is making sure that the source of payment of death taxes does not conflict with your overall estate plan.

Your options when choosing your beneficiaries The terms of your IRA or retirement plan may govern your beneficiary designations. As discussed, many qualified retirement plans require you to designate your spouse as beneficiary or, alternatively, that you have your spouse sign a consent and waiver. Some states (particularly community property states) may require similar spousal consent for IRAs. Assuming you have a choice, you should carefully consider your options and seek qualified professional advice.

The designation of a beneficiary can involve income taxes, estate tax, and other important non-tax issues. Often it will make sense to name your spouse as beneficiary of your IRA or retirement plan benefits. In other cases, it may make sense to name a child, grandchild, or other individual, a trust, a charity, or in rare cases, your estate, as beneficiary. Make sure you understand the advantages and disadvantages of each particular beneficiary choice.

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Considering an Offer to Retire Early: Should You Take It? What is it?

In today's corporate environment, where cost cutting, restructuring, and downsizing are the norm, many employers are offering their employees early retirement packages. As you near retirement age, you may find yourself confronted with an offer from your employer for early retirement. Your employer may refer to the offer as a golden handshake or a golden parachute. While many early retirement offers seem attractive at first, it is important for you to review an offer carefully before accepting it to ensure that it is indeed a golden" opportunity.

Typical elements of an early retirement offer In general An early retirement offer usually consists of severance payments and post-retirement medical coverage coupled with already existing retirement benefits.

Severance payments Severance payments are usually based on your salary and the number of years you have worked for the company. Severance payments can be distributed in either a lump sum or over a number of years.

Example(s): John has 30 years of service with the local utility company, and grosses $1,400 per week before taxes. When John reaches age 57, his employer offers him an early retirement package. The package includes a severance payment based on two weeks' salary for each year that John worked for the company ($2,800 x 30 = $84,000).

Caution: In certain cases, severance pay is considered "deferred compensation" subject to the requirements of IRC Section 409A. Ask your employer if your severance package satisfies Section 409A. If it doesn't, you could be subject to a 20 percent penalty tax.

Post-retirement medical coverage Because of the high cost of medical care, you might find it hard to turn down an early retirement package that includes post-retirement medical coverage. These packages usually provide medical coverage until you reach age 65 and become eligible to receive Medicare. However, some packages continue to provide full or reduced medical coverage past the age of 65.

Bridging Another type of early retirement offer is the Social Security "bridge payment." Your employer provides you with temporary benefits to bridge the period between early retirement and the time when your Social Security benefits are scheduled to begin. The temporary benefits are usually equivalent to the amount you will receive from Social Security at age 62.

Example(s): John, age 57, works for a local utility company. The company offers John an early retirement package that includes five years of temporary benefits. These temporary benefits are equivalent to the amount that John will receive from Social Security at age 62. The benefits serve as a "bridge" between the period of John's early retirement, age 57, and the period when he becomes eligible for early Social Security benefits at age 62.

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Evaluating an early retirement offer In general The decision of whether to accept an early retirement offer is not an easy one to make. Your company's personnel department may provide either individual or group counseling to guide you during this important decision-making process. If counseling is not available, you should speak to the person in charge of employee benefits at your company. Find out what amount you can expect to receive each year after you retire. Then, figure out the difference between what you would collect if you retire early and the amount you would earn if you continue working. Because they're often the numbers used by employers to calculate how much money you're going to receive, be sure that your company has your correct date of birth and starting date of employment.

Tip: If you choose to accept an offer for early retirement, some companies may pay (in the form of a bonus) all or part of the difference between what you would collect if you retire early and the amount you would earn if you were to continue working.

Caution: You should discuss your situation with an attorney and/or financial professional. Although a company-paid consultant may provide valuable information, they may not necessarily be acting in your best interest.

Tax/retirement plan implications If you accept an early retirement offer, you should be aware of any possible tax implications. Defined benefit plans often contain provisions that reduce your monthly benefit when you begin distributions before a certain age.

As a result, early retirement can result in lower monthly retirement benefits. Employer-sponsored retirement plans (such as 401(k)s) and traditional IRAs are generally subject to a 10 percent premature distribution tax for distributions made before age 59½. However, there are a number of exceptions to this rule. One important exception is for distributions made from 401(k)s and other qualified plans as a result of separation from service in the year you reach age 55 or later (age 50 for qualified public safety employees participating in governmental defined benefit plans). Another important exception from the 10 percent premature distribution tax is for substantially equal periodic payments (sometimes called SEPPs). Substantially equal periodic payments are amounts you receive from your IRA or qualified retirement plan not less frequently than annually for your life (or life expectancy) or the joint lives (or joint life expectancy) of you and your beneficiary. There is no minimum age requirement for this exception, but distributions from qualified retirement plans are eligible for the exception only after you separate from service.

Provided that you're over age 59½ or meet one of the exceptions, you can make penalty-free withdrawals from your account/plan. However, you may still have to pay income tax on all or part of the withdrawal. Distributions from employer-sponsored plans are usually taxable, since contributions to most of these plans are made on a pretax basis (although qualified distributions from Roth 401(k)s and Roth 403(b)s are free from federal income taxes). IRA distributions may or may not be taxable, depending on whether or not the contributions you made to the account were tax deductible. Roth IRAs are subject to special rules of their own.

Tip: While withdrawals from an IRA or retirement plan can be a valuable source of retirement income, the need for current income should be weighed against issues such as: (1) the desire to defer income tax for as long as possible, (2) the desire to preserve the assets for your beneficiaries, and (3) the possibility that, with life expectancies on the rise, you may live into your 80s or 90s and may, therefore, need to draw on those retirement assets for a long period of time.

Consequences of saying no to an offer If you're thinking about turning down your employer's offer to retire early, be aware of the consequences. If you're holding out for a better offer, keep in mind that the first offer is oftentimes the most generous. Also, if you think there is a good chance you might be let go anyway further on down the road, you may want to accept a sure thing right away rather than face the uncertainty of your company's future plans.

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Consequences of saying yes to an offer In general After careful consideration, you may find that early retirement is the way to go. However, before you jump right into retirement, you'll want to be aware of the consequences of saying yes.

Less time to save for retirement If you accept an offer to retire early, say at around age 55, you could be giving up 10 years or more of saving for retirement. Less time to save means you will have fewer savings available during retirement.

Example(s): John saves $700 a month in a tax-deferred retirement plan at a 7 percent annual return for 20 years. At age 55, his retirement savings will have grown to approximately $366,780. If John leaves that money in his account for another 10 years and earns the same 7 percent annual return, even without any additional contributions his savings will grow to approximately $737,100. If John keeps contributing for the additional 10 years, his retirement savings could be even more.

(This is a hypothetical example, and is not intended to reflect the actual performance of any specific investment, nor is it an estimate or guarantee of future value. Investment fees and expenses have not been deducted; if they had been, the accumulation totals would have been lower.)

Retirement savings will have to last for a longer period of time A lower retirement age, coupled with generally increasing life expectancies, can result in your retirement years making up one-third of your total life span. In other words, you could spend as many years in retirement as you did in the workforce. Your retirement savings will have to last for a longer period of time than if you had retired at the normal retirement age. In addition, you should consider the effect of inflation, which could eat away at the purchasing power of your retirement savings.

Your pension may be smaller If you participate in a traditional defined benefit plan, also known as a pension plan, accepting early retirement could result in a smaller pension. You should determine whether it is more valuable to have a smaller benefit over a longer period of time rather than a larger benefit over a shorter period of time. Generally, defined benefit plans are based on two factors: (1) length of service, and (2) salary during your highest earning period. If you retire early, your years of service are reduced. In addition, most employees' highest earning period occurs just before retirement, so early retirement can force you to give up your highest earning period. Furthermore, many companies impose early withdrawal penalties that can equal 5 to 7 percent of your pension for each year that you retire early.

On the other hand, employers sometimes sweeten early retirement packages, increasing your pension benefit beyond what you've earned by adding years to your age, length of service, or both, or by subsidizing your early retirement benefit or your qualified joint and survivor annuity option. These types of pension sweeteners are key features to look for in your employer's offer--especially if a reduced pension won't give you enough income.

Psychological impact In addition to determining whether or not you have the financial resources to retire, you should also consider the psychological impact of retiring early. One of the first questions that you need to ask yourself is: Am I really ready to retire? Early retirement thrusts you into a lifestyle change that you may not have expected to encounter for another 10 to 15 years. You may find it difficult to adjust from a working environment to a relaxed, laid-back lifestyle. While many people will find it easy to adjust to a lifestyle that includes vacations and golfing, others may have a hard time dealing with all the free time.

Fortunately, there are ways for people who have a difficult time coping with this sudden change in lifestyle to ease themselves into retirement. Not only can a part-time job provide you with extra cash, but it can also help keep you busy.

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Career counseling What if you can't afford to retire? Finding a new job You may find yourself having to accept an early retirement offer, even though you can't afford to retire. One way to make up for the difference between what you receive from your early retirement package and your old paycheck is to find a new job, but that doesn't mean that you have to abandon your former line of work for a new career. You can start by finding out if your former employer would hire you as a consultant. Or, you may find that you would like to turn what was once just a hobby into a second career. Then there is always the possibility of finding full-time or part-time employment with a new employer.

If you have been out of the job market for a long time, you might not feel comfortable or have experience marketing yourself for a new job. Some companies provide career counseling to assist employees in re-entering the workforce. If your company does not provide you with this service, you may want to look into outplacement firms and nonprofit organizations in your area that deal with career transition.

Caution: Many early retirement offers contain noncompetition agreements or offer monetary inducements on the condition that you agree not to work for a competitor. However, you should be able to work for a new employer and still receive your pension and other retirement plan benefits.

Retirement planning issues Medicare--age 65 Even though you can receive early Social Security retirement benefits, you are not eligible for Medicare benefits until age 65. If your early retirement package does not include post-retirement medical coverage, you may have to look into alternative methods of obtaining health benefits, such as through COBRA (Consolidated Omnibus Reconciliation Act of 1985) or private health insurance, until you are eligible to begin receiving Medicare benefits.

Social Security--age 62 If you accept an early retirement offer, you'll want to consider applying for early Social Security retirement benefits. The Social Security Administration allows any individual who is eligible to receive Social Security benefits at the normal retirement age the option of receiving benefits beginning at age 62. However, if you decide to receive Social Security benefits before the normal retirement age, the benefits you receive will be reduced.

Tip: If you accept an early retirement offer from your employer, you are not required to begin receiving early Social Security retirement benefits before normal retirement age.

Can you afford to retire early?

Whether or not you have the financial resources to retire early depends on how much you have in retirement income and how much you plan to spend when you retire. Your early retirement income includes your early retirement package (severance payments and retirement benefits), Social Security (if you receive benefits before the normal retirement age), personal savings and investments, and wages (if you work after early retirement). To determine how much you will spend, you must estimate your annual living expenses for early retirement.

It is important to note that your annual living expenses during early retirement are likely to differ from your expenses later in retirement. During early retirement, you may find yourself still paying off a mortgage, funding your children's education, and paying for medical coverage. The worksheets that follow can help you to estimate your early retirement income and living expenses, and determine whether or not you can afford to retire early.

Annual Early Retirement Living Expenses Housing (mortgage, rent, homeowners/rental insurance, maintenance, furnishings, property taxes) $

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Utilities (electricity, heat, water, phone, cable)

$

Transportation (car payments, insurance, gas, repairs, etc.)

$

Food

$

Insurance (medical, dental, disability, life)

$

Taxes (Federal/State income taxes, Social Security if you plan on working after early retirement)

$

Education

$

Clothing

$

Travel and recreation

$

Debts (loans, credit card payments)

$

Gifts (charitable, personal)

$

Savings and Investments

$

Miscellaneous

$

TOTAL

$

Caution: If your early retirement package does not include medical coverage, remember to calculate the cost of health care into your early retirement living expenses.

Early Retirement Income Early retirement package (severance payments, retirement benefits)

$

Social Security (if you receive your benefits before normal retirement age) $ Personal savings and investments

$

Wages (if you work after early retirement)

$

TOTAL

$

Tip: When you estimate your early retirement living expenses and income, it is important to consider inflation, which has historically averaged three percent annually.

Financial concerns Loss of health insurance If your early retirement package does not include company-paid health benefits, you still may be eligible for health insurance through COBRA. You are entitled to COBRA coverage if you work for a company that provides employees with a group health plan and has 20 or more covered employees. COBRA allows you to pay for your health insurance at the same rate your company pays, plus a small administrative fee. COBRA coverage lasts up to 18 months from the date of retirement, and does not require you to qualify for coverage or worry about pre-existing conditions. Once your COBRA coverage runs out, you will have to purchase private insurance if you want to continue health insurance coverage until you are old enough to qualify for Medicare coverage.

Reduction in Social Security benefits Your Social Security benefits are based on what is known as the primary insurance amount (PIA). The PIA is based on your average indexed monthly earnings (AIME). If you retire at the normal retirement age (see the following Social Security Administration table), your monthly benefit will be equal to your PIA. However, if you

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receive your Social Security retirement benefits early, your monthly benefit will be less than your PIA. Age for Receiving Full Social Security Benefits Year of Birth

Normal Retirement Age

1937 or earlier 65 1938

65 and 2 months

1939

65 and 4 months

1940

65 and 6 months

1941

65 and 8 months

1942

65 and 10 months

1943 - 1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 and later 67 If you elect to receive Social Security retirement benefits early, you can receive more benefit checks than if you retire at normal retirement age. While this might seem profitable, you will suffer a permanent reduction in your monthly benefits. The reduced benefit is based on a deduction of approximately 5/9 of 1 percent (.0056) for each month you receive benefits before the normal retirement age up to 36 months, and a deduction of 5/12 of 1 percent thereafter. Your total lifetime benefits would remain the same based on standard life expectancy assumptions. However, your benefits are spread out over a longer period of time, which results in lower monthly benefits.

Example(s): Mary retires from the local utility company at age 62, and elects to receive her Social Security benefits early. If Mary had waited to receive her Social Security benefits until her normal retirement age of 65, she would have received 100 percent of her primary insurance amount (PIA) benefit, or $800. Because Mary elected to receive her benefits at age 62, there is a reduction of 5/9 of 1 percent (.0056) for each of the 36 months that she receives benefits prior to the normal retirement age. Thus, Mary will receive approximately $640, or 20 percent less (.0056 x 36), than she would have received at normal retirement age.

Tip: The application process for early Social Security retirement benefits can take as long as three months. The Social Security Administration recommends that you contact its office prior to your 62nd birthday.

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Traditional IRA: How Much Can You Contribute and Deduct in 2010?

If you are married, use this worksheet twice, once for you and once for your spouse.

See Quick Summary Step One: How Much Can You Contribute to a Traditional IRA? You need to know how much you can contribute to a traditional IRA before you calculate how much you can deduct. The amount that you can contribute to a traditional IRA depends on the amount of taxable compensation that you (and, in some cases, your spouse) had for the year. All, part, or none of your traditional IRA contribution may be tax deductible on your federal income tax return.

Go to Step One Step Two : How Much Can You Deduct?

The amount of your federal income tax deduction depends on a number of factors, including whether you or your spouse is covered by an employer-sponsored retirement plan (e.g., a 401(k) plan), your income tax filing status for the year of the contribution, and your modified adjusted gross income for that same year. The amount that you can deduct represents the first dollars that you contribute to your traditional IRA. If you choose to contribute more (up to your maximum allowed contribution from Step One), these additional dollars would be treated as a nondeductible contribution.

For example, you determine that you can contribute up to $5,000 to a traditional IRA, but can deduct only up to $500. You may contribute $500 to a traditional IRA and deduct the full amount. If you contribute $5,000 to the traditional IRA, you can deduct $500, and the remaining $4,500 will be considered a nondeductible contribution.

Go to Step Two

Quick Summary If you are covered by an employer-sponsored retirement plan, the amount of tax-deductible contribution you can make to a traditional IRA (if any) depends on your modified adjusted gross income (MAGI) and federal income tax filing status for the year in which you contribute (see table below): If your filing status is (see notes 1-3 below):

Your traditional IRA deduction is reduced if your MAGI is between:

Your traditional IRA deduction is eliminated if your MAGI is:

Single or head of household

$56,000 - $66,000

$66,000 or more

Married filing jointly, or qualifying widow(er)

$89,000 - $109,000

$109,000 or more

Married filing separately

$0 - $10,000

$10,000 or more

1. Generally, if you haven't reached age 70½ by the end of the tax year, you can contribute up to $5,000 a year to a traditional IRA if you have at least that much in taxable compensation for the year. In addition, if you are 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution.

2. Generally, if neither you nor your spouse is covered by an employer-sponsored retirement plan, the full amount of your traditional IRA contribution is tax deductible on your federal income tax return.

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3. Certain low- and middle-income taxpayers may also be eligible for a partial income tax credit for contributing to an IRA (traditional or Roth). If you qualify for such a credit, it is in addition to any income tax deduction you might receive for making the contribution. See Tax Credit for IRAs and Retirement Plans for more information.

4. If any of the following apply, this summary is inadequate and you'll need to work through Step One and Step Two of this worksheet (see above) to determine the amounts that you can contribute and/or deduct: • You do not have at least $5,000 ($6,000 if age 50 or older) in taxable compensation for the year.

• You are covered by an employer-sponsored retirement plan during the year of the contribution, and your MAGI falls within the applicable range listed in the middle column of the above table.

• You are not covered by an employer-sponsored retirement plan during the year of the contribution, but your spouse is covered by such a plan.

Note: Special rules may apply to contributions by certain former Enron employees, repayments of qualified reservist distributions, and repayment of distributions by certain victims of presidentially declared natural disasters.

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Traditional IRA: How Much Can You Contribute and Deduct in 2009?

If you are married, use this worksheet twice, once for you and once for your spouse.

See Quick Summary Step One: How Much Can You Contribute to a Traditional IRA? You need to know how much you can contribute to a traditional IRA before you calculate how much you can deduct. The amount that you can contribute to a traditional IRA depends on the amount of taxable compensation that you (and, in some cases, your spouse) had for the year. All, part, or none of your traditional IRA contribution may be tax deductible on your federal income tax return.

Go to Step One Step Two : How Much Can You Deduct?

The amount of your federal income tax deduction depends on a number of factors, including whether you or your spouse is covered by an employer-sponsored retirement plan (e.g., a 401(k) plan), your income tax filing status for the year of the contribution, and your modified adjusted gross income for that same year. The amount that you can deduct represents the first dollars that you contribute to your traditional IRA. If you choose to contribute more (up to your maximum allowed contribution from Step One), these additional dollars would be treated as a nondeductible contribution.

For example, you determine that you can contribute up to $5,000 to a traditional IRA, but can deduct only up to $500. You may contribute $500 to a traditional IRA and deduct the full amount. If you contribute $5,000 to the traditional IRA, you can deduct $500, and the remaining $4,500 will be considered a nondeductible contribution.

Go to Step Two

Quick Summary If you are covered by an employer-sponsored retirement plan, the amount of tax-deductible contribution you can make to a traditional IRA (if any) depends on your modified adjusted gross income (MAGI) and federal income tax filing status for the year in which you contribute (see table below): If your filing status is (see notes 1-3 below):

Your traditional IRA deduction is reduced if your MAGI is between:

Your traditional IRA deduction is eliminated if your MAGI is:

Single or head of household

$55,000 - $65,000

$65,000 or more

Married filing jointly, or qualifying widow(er)

$89,000 - $109,000

$109,000 or more

Married filing separately

$0 - $10,000

$10,000 or more

1. Generally, if you haven't reached age 70½ by the end of the tax year, you can contribute up to $5,000 a year to a traditional IRA if you have at least that much in taxable compensation for the year. In addition, if you are 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution.

2. Generally, if neither you nor your spouse is covered by an employer-sponsored retirement plan, the full amount of your traditional IRA contribution is tax deductible on your federal income tax return.

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3. Certain low- and middle-income taxpayers may also be eligible for a partial income tax credit for contributing to an IRA (traditional or Roth). If you qualify for such a credit, it is in addition to any income tax deduction you might receive for making the contribution. See Tax Credit for IRAs and Retirement Plans for more information.

4. If any of the following apply, this summary is inadequate and you'll need to work through Step One and Step Two of this worksheet (see above) to determine the amounts that you can contribute and/or deduct: • You do not have at least $5,000 ($6,000 if age 50 or older) in taxable compensation for the year.

• You are covered by an employer-sponsored retirement plan during the year of the contribution, and your MAGI falls within the applicable range listed in the middle column of the above table.

• You are not covered by an employer-sponsored retirement plan during the year of the contribution, but your spouse is covered by such a plan.

Note: Special rules may apply to contributions by certain former Enron employees, repayments of qualified reservist distributions, and repayment of distributions by certain victims of presidentially declared natural disasters.

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Roth IRA: How Much Can You Contribute in 2010?

If you are married, and both you and your spouse plan to contribute to Roth IRAs, determine your allowable contribution amounts separately. If you are using this worksheet, complete it once for you and once for your spouse.

The way that you calculate your allowable contribution depends on your income tax filing status for the year of the contribution: • Single or head of household • Married filing jointly or qualifying widow(er) • Married filing separately Caution: If you are married, did not live with your spouse at any time during the year, and file separate returns, you are considered single for purposes of determining your allowable contribution to a Roth IRA.

Quick Summary Your ability to contribute to a Roth IRA depends in part on the amount of taxable compensation that you (and, in some cases, your spouse) received for the year. In addition, your ability to contribute to a Roth IRA may be limited (or phased out entirely) if your modified adjusted gross income (MAGI) for the year is too high.

If your federal income tax filing status is:

Your ability to contribute to a Roth IRA is limited if your MAGI is between:

You cannot contribute to a Roth IRA if your MAGI is:

Single or head of household

$105,000 - $120,000

$120,000 or more

Married filing jointly or qualifying widow(er)

$167,000 - $177,000

$177,000 or more

Married filing separately

$0 - $10,000

$10,000 or more

Note: Contributions to a Roth IRA are never tax deductible on your federal income tax return. However, certain low- and middle-income taxpayers can claim a partial income tax credit for amounts contributed to an IRA (Roth or traditional).

Note: Taxpayers age 50 and older can make an additional "catch-up" contribution to an IRA (Roth or traditional), over and above the general IRA contribution limit. The annual catch-up contribution amount is $1,000 for 2010.

Note: Special rules may apply to qualified individuals impacted by certain natural disasters, certain former Enron employees, certain employees of bankrupt airlines, taxpayers who receive certain Exxon Valdez settlement payments, and certain reservists and national guardsmen called to active duty after Spetember 11, 2001

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Roth IRA: How Much Can You Contribute in 2009?

If you are married, and both you and your spouse plan to contribute to Roth IRAs, determine your allowable contribution amounts separately. If you are using this worksheet, complete it once for you and once for your spouse.

The way that you calculate your allowable contribution depends on your income tax filing status for the year of the contribution: • Single or head of household • Married filing jointly or qualifying widow(er) • Married filing separately Caution: If you are married, did not live with your spouse at any time during the year, and file separate returns, you are considered single for purposes of determining your allowable contribution to a Roth IRA.

Quick Summary Your ability to contribute to a Roth IRA depends in part on the amount of taxable compensation that you (and, in some cases, your spouse) received for the year. In addition, your ability to contribute to a Roth IRA may be limited (or phased out entirely) if your modified adjusted gross income (MAGI) for the year is too high.

If your federal income tax filing status is:

Your ability to contribute to a Roth IRA is limited if your MAGI is between:

You cannot contribute to a Roth IRA if your MAGI is:

Single or head of household

$105,000 - $120,000

$120,000 or more

Married filing jointly or qualifying widow(er)

$166,000 - $176,000

$176,000 or more

Married filing separately

$0 - $10,000

$10,000 or more

Note: Contributions to a Roth IRA are never tax deductible on your federal income tax return. However, certain low- and middle-income taxpayers can claim a partial income tax credit for amounts contributed to an IRA (Roth or traditional).

Note: Taxpayers age 50 and older can make an additional "catch-up" contribution to an IRA (Roth or traditional), over and above the general IRA contribution limit. The annual catch-up contribution amount is $1,000 for 2009.

Note: Special rules may apply to contributions by certain former Enron employees, contributions by certain employees of bankrupt airlines, repayments of qualified reservist distributions, and repayment of distributions by certain victims of presidentailly declared natural disasters.

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Investing for Retirement Keep in mind...

• A well-diversified portfolio can help balance risk • The earlier you start investing, the more you can contribute over the course of your working lifetime • By starting early, your investments will have a longer period of time to compound • With a longer time frame, you will have a larger choice of investment possibilities

Why save for retirement?

Because people are living longer. According to the U.S. Administration on Aging, persons reaching age 65 have an average life expectancy of an additional 18.6 years.* And since Social Security accounts for only 36 percent of total aggregate income for aged persons,** Social Security alone may not be enough to see you through your retirement years.

What to do...

• Assess your risk tolerance • Determine your investing time frame • Determine the amount of money you can invest • Choose investments that are appropriate for your risk tolerance and time horizon • Seek professional management, if necessary *Source: National Vital Statistics Report,Volume 58, Number 1, 2009 **Source: Fast Facts & Figures About Social Security, 2009, Social Security Administration

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Comparison of Traditional IRAs and Roth IRAs Traditional IRA

Roth IRA

What is the maximum annual contribution (2010)?*

Lesser of $5,000 or 100% of earned income ($6,000 if age 50 or older)

Lesser of $5,000 or 100% of earned income ($6,000 if age 50 or older)

What is the maximum annual contribution to a spousal IRA (for a spouse with little or no earned income) (2010)?*

Lesser of $5,000 or 100% of combined earned income ($6,000 if age 50 or older)

Lesser of $5,000 or 100% of combined earned income ($6,000 if age 50 or older)

Is your ability to contribute phased out for higher incomes?

No

Yes

Yes. Fully deductible if neither you nor your spouse is covered by a retirement plan. Otherwise, your deduction depends on your income and filing status.

No. Contributions to a Roth IRA are never tax deductible.

Tax deferred

Tax deferred; tax free if you meet the requirements for a qualified distribution

Are distributions included in your taxable income?

Yes, to the extent that the distribution consists of tax-deductible contributions and investment earnings

Qualified distributions are completely tax free; otherwise, the portion that represents investment earnings is included in your taxable income

Are you required to take distributions during your life?

Yes, the required minimum distribution (RMD) rule applies after you reach age 70½ (waived for 2009)

No, distributions are not required until after your death

Can contributions be made after age 70½?***

No

Yes, if you have earned income

Does a 10% early withdrawal penalty apply to distributions made before age 59½?

Yes, on the taxable portion of the distribution**

Yes, on the taxable portion of the distribution**

Includable in your taxable estate at death?

Yes

Yes

Do your beneficiaries pay income tax on distributions after your death?

Yes, to the extent that a distribution represents deductible contributions and investment earnings

Generally no, as long as the account has been in existence for at least five years

Is your contribution tax deductible on your federal income tax return?

How are earnings taxed?

*Note: Certain low- and middle-income taxpayers may be able to claim a partial income tax credit for amounts contributed to a traditional IRA or Roth IRA. The credit is phased out based on income. **There are a number of exceptions to the early withdrawal penalty (e.g., distributions made due to qualifying disability). See Premature Distribution Rule for details. Special rules apply to amounts converted from a traditional IRA to a Roth IRA. ***Rollover contributions can be made regardless of age or earned income.

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Can You Contribute to an IRA in 2010?

Whether or not you can contribute to an IRA in any given year (and how much you can contribute) depends on some combination of the following variables: the type of IRA (traditional or Roth), your age, your annual income, and the filing status on your federal income tax return. • Click here if you file as single or head of household • Click here if you file as married filing jointly or qualifying widow(er) • Click here if you file as married filing separately Note: Married couples should evaluate their options independently. In other words, consider qualifications separately for each spouse. One spouse may qualify to contribute to an IRA even if the other spouse does not.

Caution: If you are married but did not live with your spouse at any time during the year, and you file separate income tax returns, you are considered a single taxpayer for purposes of determining your allowable contribution (if any) to a traditional or Roth IRA. Note: You can make a rollover contribution to an IRA in any amount regardless of your age or income. Special contribution rules apply to certain military reservists who have received "qualified reservist distributions" and to certain former Enron employees.

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Can You Contribute to an IRA in 2009?

Whether or not you can contribute to an IRA in any given year (and how much you can contribute) depends on some combination of the following variables: the type of IRA (traditional or Roth), your age, your annual income, and the filing status on your federal income tax return. • Click here if you file as single or head of household • Click here if you file as married filing jointly or qualifying widow(er) • Click here if you file as married filing separately Note: Married couples should evaluate their options independently. In other words, consider qualifications separately for each spouse. One spouse may qualify to contribute to an IRA even if the other spouse does not.

Caution: If you are married but did not live with your spouse at any time during the year, and you file separate income tax returns, you are considered a single taxpayer for purposes of determining your allowable contribution (if any) to a traditional or Roth IRA. Note: You can make a rollover contribution to an IRA in any amount regardless of your age or income. Special contribution rules apply to certain military reservists who have received "qualified reservist distributions" and to certain former Enron employees.

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Deductible Contribution Phaseout Limits for Traditional IRAs If you are covered by a 401(k) plan or other employer-sponsored retirement plan, your ability to make tax-deductible contributions to a traditional IRA depends on your annual income (modified adjusted gross income, or MAGI) and your federal income tax filing status. The income ranges that apply each year are as follows: • Click here if you file as single or head of household • Click here if you file as married filing jointly or qualifying widow(er) • Click here if you file as married filing separately Caution: If you are married but did not live with your spouse at any time during the year, and you file separate income tax returns, you are considered a single taxpayer for purposes of determining your ability to make tax-deductible contributions to a traditional IRA. Caution: If you are not covered by an employer-sponsored retirement plan, but your spouse is covered by such a plan, special rules may apply. See Traditional Deductible IRAs for more information.

Single or head of household

Tax year

Your traditional IRA deduction is reduced if your MAGI is:

Your traditional IRA deduction is eliminated if your MAGI is:

2005 and 2006

$50,000 to $60,000

$60,000 or more

2007*

$52,000 to $62,000

$62,000 or more

2008

$53,000 to $63,000

$63,000 or more

2009

$55,000 to $65,000

$65,000 or more

2010

$56,000 to $66,000

$66,000 or more

Married filing jointly or qualifying widow(er)

Tax year

Your traditional IRA deduction is reduced if your MAGI is:

Your traditional IRA deduction is eliminated if your MAGI is:

2005

$70,000 to $80,000

$80,000 or more

2006

$75,000 to $85,000

$85,000 or more

2007*

$83,000 to $103,000

$103,000 or more

2008

$85,000 to $105,000

$105,000 or more

2009

$89,000 to $109,000

$109,000 or more

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Page 68 of 151 $89,000 to $109,000

$109,000 or more

Married filing separately If you file as married filing separately, your traditional IRA deduction is reduced if your MAGI is between $0 and $10,000, and eliminated if $10,000 or more.

Tip: To determine the exact amount of your traditional IRA deduction for 2009 (if any), see Traditional IRA Worksheet: How Much Can You Contribute and Deduct in 2009? For 2010, see Traditional IRA Worksheet: How Much Can You Contribute and Deduct in 2010? You should also consult a tax advisor or other professional to make certain that your calculations are correct. * Beginning in 2007, these income limits are adjusted for inflation in increments of $1,000.

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Converting Funds from a Traditional IRA to a Roth IRA: Factors to Consider

Questions

Factors to consider

Do you qualify to convert funds from a traditional IRA to a Roth IRA?*

• Guessing incorrectly may have serious consequences; the conversion of funds from a traditional IRA to a Roth IRA is considered a taxable distribution, subject to federal income tax and a possible penalty.

• The fact that you qualify to convert funds from a traditional IRA to a Roth IRA doesn't necessarily mean you should; consider the following factors before making a decision.

Will you pay the tax that results from converting funds with outside (non-IRA) funds?

• Converting traditional IRA funds to a Roth IRA will result in federal income tax due on those funds (to the extent that those funds consist of investment earnings and tax-deductible contributions).

• Paying the tax due with IRA funds reduces the amount that grows tax free in the Roth IRA. • IRA funds used to pay the tax may be subject to additional income tax and possibly a penalty.

• Paying the tax due with non-IRA funds allows more dollars to be funneled into the tax-free Roth IRA.

Do you expect to be in the same or in a lower or higher income tax bracket when you eventually take IRA distributions?

• If your tax bracket remains the same and you pay the tax that results from converting funds with IRA dollars, the conversion may have no tax consequence.

• If you'll be in a lower tax bracket when you take IRA distributions, paying tax now on converted funds at your present (higher) rate may not be very appealing.

• If you'll be in a higher tax bracket when you take distributions, you can convert funds to a Roth IRA now and pay tax at your present (lower) tax rate, and distributions will be tax free later (assuming you qualify for tax-free withdrawals--see below).

Can you leave your funds in your Roth IRA for at least 5 years?

• If you withdraw funds after 5 years from the time you establish any Roth IRA you may qualify for tax-free and penalty-free withdrawals if you meet one of serveral other conditions (a qualified withdrawal).

• If you convert a traditional IRA to a Roth IRA, and then make a nonqualified withdrawal within 5 years of the conversion, the earnings you withdraw will be subject to income tax, and your entire withdrawal may be subject to a 10% penalty unless an exception applies (age 59½, etc.).

Can you leave your funds in your Roth IRA for at least 10 years?

• This time frame becomes more important when you're paying the tax that results from converting funds with IRA funds.

• Generally, converting funds to a Roth IRA makes sense if you plan to leave the funds in the Roth IRA for 10 years or more.

• If you plan to take distributions from the Roth IRA within the next 10 years, make sure converting funds is in your best interest.

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Can you live comfortably in retirement without taking IRA distributions?

• You can keep contributing to the Roth IRA after age 70½, as long as you have sufficient earned income.

• Unlike a traditional IRA, you aren't required to take annual minimum distributions from a Roth IRA after age 70½ or at any time during your life.

• Assuming 5 years have elapsed from the time you established anyRoth IRA, your beneficiary receives Roth IRA funds free from federal income tax (but not necessarily from federal estate tax) when you die.

Does your traditional IRA consist of any nondeductible (after-tax) contributions?

• You've already paid federal income tax on any nondeductible contributions to your traditional IRA, so these dollars are not subject to federal income tax when you convert funds to a Roth IRA. • After you convert funds, future investment earnings on your Roth IRA will accrue tax free.

When you die, will federal estate tax be due?

• When you die, the value of your IRA (traditional or Roth) will be included in your taxable estate to determine if federal estate tax is due.

• When you convert funds from a traditional IRA to a Roth IRA, you pay federal income tax on your IRA funds now rather than later.

• The money you use to pay the tax now effectively removes those dollars from your taxable estate, potentially reducing your federal estate tax liability after your death.

Will you apply for financial aid in the next few years?

• When you convert funds from a traditional IRA to a Roth IRA, you pay federal income tax on your IRA funds now rather than later.

• The money you use to pay the tax now effectively removes those dollars from the assets to be considered in determining your child's eligibility for financial aid.

Are you currently receiving Social Security benefits?

• The portion of your Social Security benefits that is taxable in any year depends on your income and tax filing status for that year.

• Excluding any nondeductible contributions, funds that you convert to a Roth IRA are treated as taxable income to you for that year.

• If more of your Social Security benefits will be taxed as a result of converting funds to a Roth IRA, factor in the additional tax cost to you.

• Balance this cost against the fact that distributions from Roth IRAs, in addition to being tax free, are not currently counted in determining the taxable portion of your Social Security benefits.

Does your state follow the federal income tax treatment of Roth IRAs?

• If your state does not follow the federal income tax treatment of Roth IRAs, you must factor in the way that your state tax treatment will affect your situation.

Does your state provide Roth IRAs with protection from creditors equal to that provided to traditional IRAs?

• Up to $1,095,000 (and in some cases more) of your total IRA assets, Roth and traditional, are protected under federal law in the event you declare bankruptcy. State law may provide additional creditor protection, but the protection given to funds in Roth IRAs may be less than that given to funds in traditional IRAs. • If you have a significant percentage of your assets in IRAs and you are at risk of being sued by creditors, you should consider your state's degree of creditor protection for each type of IRA.

* If you convert a traditional IRA to a Roth IRA in 2010, you can report all of the taxable income from the conversion on your 2010 tax return, or instead report half of the income on your 2011 return, and half on your 2012 return. For more information

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on this special rule for 2010 conversions only, see Converting or Rolling Over Traditional IRAs to Roth IRAs. If you participate in a 401(k) or 403(b) plan at work, you may be able to make Roth contributions to the plan. (Check with your plan administrator--401(k) and 403(b) plans aren't required to offer this option.)

Qualified distributions of Roth contributions and related earnings are income tax free (and penalty free) at the federal level. This may be a factor in your decision of whether to convert funds from a traditional IRA to a Roth IRA. However, be sure to discuss your situation with a professional advisor before making any decisions.

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401(k) Plans

Key strengths • You receive "free" money if your contributions are matched by your employer • You decide how much to save (within federal limits) and how to invest your 401(k) money • Your regular 401(k) contributions are made with pretax dollars • Earnings accrue tax deferred until you start making withdrawals, usually after retirement • Your Roth 401(k) contributions (if your plan allows them) are made with after-tax dollars; there's no upfront tax benefit, but distributions of your contributions are always tax free and, if you satisfy a five-year waiting period, distributions of earnings after age 59½, or upon your disability or death, are also tax free • You may qualify for a partial income tax credit • Plan loans may be available to you • Hardship withdrawals may be available to you, though income tax and perhaps an early withdrawal penalty will apply, and you may be suspended from participating for up to six months • Your employer may provide full-service investment management • Savings in a 401(k) are exempt from creditor claims in bankruptcy (but not from IRS claims)

A 401(k) plan is a type of employer sponsored retirement plan in which you can elect to defer receipt of some of your wages until retirement. If you make pre-tax contributions, your taxable income is reduced by the amount that you contribute to the plan each year, up to certain limits. The contributed amount and any investment earnings are taxed to you when withdrawn or distributed. If your plan allows after-tax Roth contributions, there's no immediate tax benefit, but qualified distributions are entirely tax free.

Most 401(k) plans offer an assortment of investment options, ranging from conservative to aggressive.

Bear in mind...

• 401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss • If you withdraw the funds prior to age 59½ (age 55 in certain circumstances) you may have to pay a 10 percent early withdrawal penalty (in addition to ordinary income tax) • The IRS limits the amount of money you can contribute to your 401(k) • Unless the plan is a SIMPLE 401(k) plan, you may have to work for your employer up to five years to fully own employer matching contributions

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Retirement Options for Executives Excess Benefit Plan Definition A nonqualified deferred compensation plan maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations imposed by Section 415. The plan may be funded or unfunded.

Advantages

Disadvantages

• Allows highly compensated employees who participate in a qualified retirement plan to supplement their retirement savings • Taxation may be deferred if the plan is "unfunded"; amounts contributed are generally includable in income when received by the employee (or made available to the employee)

• If the plan is funded, the employee is taxed immediately on all employer contributions unless the benefits are subject to a substantial risk of forfeiture • Can be risky; benefits might not be paid in the future if the plan is unfunded • ERISA's safeguards do not apply to unfunded plans, and only partially apply to funded plans

Supplemental Executive Retirement Plan (SERP) Definition A nonqualified deferred compensation plan that provides retirement benefits to a select group of executives without regard to limits imposed on qualified plans. Properly structured, the plan is unfunded for ERISA purposes.

Advantages

Disadvantages

• Allows executives to supplement their retirement savings • Taxation is deferred; account is generally includable in income as received by the executive (or when made available to the executive)

• As an "unfunded" plan, most of ERISA's safeguards do not apply • Can be risky; benefits might not be paid in the future

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Annuities

Key Strengths • Interest generated by an annuity accrues tax deferred until withdrawn • You can receive payments from the annuity for your entire lifetime, regardless of how long you may live* • There are normally no contribution limits • There are many different types of annuities to choose from • You pay taxes only on the earnings portion of annuity payments • At death, proceeds from an annuity pass free from probate to your named beneficiary

An annuity is a contract between you and an issuer (usually an insurance company).

In its simplest form, you pay a premium in exchange for future periodic payments to begin immediately (an immediate annuity) or at some future date (a deferred annuity) and to continue for a period that can be as long as your lifetime.*

Key Tradeoffs • Annuities carry fees and expenses • May have surrender charges • Contributions are not tax deductible • There may be tax penalties for early withdrawals prior to age 59½ (subject to exceptions) • Once you elect a specific distribution plan, annuitize the annuity, and begin receiving payments, that election is usually irrevocable (with some exceptions) *Guarantees are subject to the claims-paying ability of the issuing insurance company.

Note:Annuities are long-term tax-deferred investment vehicles intended to be used for retirement purposes. Any gains in tax-deferred investment vehicles, including annuities, are taxable as ordinary income upon withdrawal. For variable annuities, investment returns and the principal value of the available sub-account portfolios will fluctuate based on the performance of the underlying investments so that the value of the investor's units, when redeemed, may be worth more or less than their original value.

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Sources of Retirement Income: Filling the Social Security Gap According to the Social Security Administration, more than nine out of ten individuals age 65 and older receive Social Security benefits. But most retirees also rely on other sources of retirement income, as shown on this chart:

Note: Data may not total 100% due to rounding.

Source: Fast Facts & Figures About Social Security, 2009,Social Security Administration

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Saving For Your Retirement

* Employers can allow employees to make after-tax "Roth" contributions to the employer's 401(k) or 403(b) plan. Qualified distributions of these contributions and related earnings are tax free. ** Individuals age 50 and over may make additional $1,000 IRA catch-up contributions.

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How a Fixed Deferred Annuity Works

1. In the accumulation phase, you (the annuity owner) send your premium payment(s) (all at once or over time) to the annuity issuer. If these payments are made with after-tax funds, you may invest an unlimited amount.

2. The annuity issuer places your funds in its general account.* Your annuity contract specifies how your principal will be returned as well as what rate(s) of interest you'll earn during the accumulation phase. Your contract will also state what minimum interest rate applies.** 3. The compounding interest on your annuity accumulates tax deferred. You won't be taxed on these earnings until funds are withdrawn or distributed.

4. The issuer may collect fees to manage your annuity account. You may also have to pay the issuer a surrender fee if you

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withdraw money in the early years of your annuity.

5. Your annuity contract may contain a guaranteed** death benefit or other provisions for a payout upon the death of the annuitant. (As the annuity owner, you're most often also the annuitant, although you don't have to be.)

6. If you make a withdrawal from your deferred fixed annuity before you reach age 59½, you'll not only have to pay tax (at your ordinary income tax rate) on the earnings portion of the withdrawal, but you may also have to pay a 10 percent premature distribution tax, unless an exception applies.

7. After age 59½, you may make withdrawals from your annuity without incurring any premature distribution tax. Since nonqualified annuities have no minimum distribution requirements, you don't have to make any withdrawals. However, your annuity contract may specify an age at which you must begin taking income payments.

8. To obtain a guaranteed** fixed income stream for life or for a certain number of years, you could annuitize, which means exchanging the annuity's cash value for a series of periodic income payments. The amount of these payments will depend on a number of factors, including the cash value of your account at the time of annuitization, the age(s) and gender(s) of the annuitant(s), and the payout option chosen. Usually, you can't change the payments once you've begun receiving them.

9. You'll have to pay taxes (at your ordinary income tax rates) on the earnings portion of any withdrawals or annuitization payments you receive.

*These funds are invested as part of the general assets of the issuer and are therefore subject to the claims of its creditors. **All guarantees are subject to the claims-paying ability of the issuing company.

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How a Variable Annuity Works

1. In the accumulation phase, you (the annuity owner) send your premium payment(s) (all at once or over time) to the annuity issuer. If these payments are made with after-tax funds, you may invest an unlimited amount.

2. You may choose how to allocate your premium payment(s) among the various investments offered by the issuer. These investment choices, often called subaccounts, typically invest directly in mutual funds. Generally, you can also transfer funds among investments without paying tax on investment income and gains.

3. The issuer may collect fees to manage your annuity account. These may include an annual administration fee, underlying fund fees and expenses which include an investment advisory fee, and a mortality and expense risk charge. If you withdraw money in the early years of your annuity, you may also have to pay the issuer a surrender fee.

4. The earnings in your subaccounts grow tax deferred; you won't be taxed on any earnings until you begin withdrawing funds or begin taking annuitization payments.

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5. With the exception of a fixed account option where a guaranteed* minimum rate of interest applies, the issuer of a variable annuity generally doesn't guarantee any return on the subaccounts you choose. While you might experience substantial growth in your investments, your choices could also perform poorly, and you could lose money.

6. Your annuity contract may contain provisions for a guaranteed* death benefit or other payout upon the death of the annuitant. (As the annuity owner, you're most often also the annuitant, although you don't have to be.)

7. Just as you may choose how to allocate your premiums among the subaccount options available, you may also select the subaccounts from which you'll take the funds if you decide to withdraw money from your annuity.

8. If you make a withdrawal from your annuity before you reach age 59½, you'll not only have to pay tax (at your ordinary income tax rate) on the earnings portion of the withdrawal, but you may also have to pay a 10 percent premature distribution tax.

9. After age 59½, you may make withdrawals from your annuity proceeds without incurring any premature distribution tax.

Since nonqualified annuities have no minimum distribution requirements, you don't have to make any withdrawals. However, your annuity contract may specify an age at which you must begin taking income payments.

10. To obtain a guaranteed income stream* for life or for a certain number of years, you can annuitize which means exchanging the annuity's cash value for a series of periodic income payments. The amount of these payments will depend on a number of factors including the cash value of your account at the time of annuitization, the age(s) and gender(s) of the annuitant(s), and the payout option chosen. Usually, you can't change the payments once you've begun receiving them.

11. You'll have to pay taxes (at your ordinary income tax rate) on the earnings portion of any withdrawals or annuitization payments you receive. *All guarantees are subject to the claims-paying ability of the issuing company.

Note:Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

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Retirement Planning: The Basics You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap Once you have estimated your retirement income needs, take stock of your estimated future assets and income.

These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer: • At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.

• What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.

• What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.

• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

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Build your retirement fund: Save, save, save When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings).

This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon.

Use the right savings tools The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement.

Both 401(k) and 403(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity.

A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company).

Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).

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Estimating Your Retirement Income Needs You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.

Use your current income as a starting point It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there's a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you'll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn't account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It's fine to use a percentage of your current income as a benchmark, but it's worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project your retirement expenses Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses: • Food and clothing • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs • Utilities: Gas, electric, water, telephone, cable TV • Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation • Insurance: Medical, dental, life, disability, long-term care • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs • Taxes: Federal and state income tax, capital gains tax • Debts: Personal loans, business loans, credit card payments • Education: Children's or grandchildren's college expenses • Gifts: Charitable and personal • Savings and investments: Contributions to IRAs, annuities, and other investment accounts • Recreation: Travel, dining out, hobbies, leisure activities • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of

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assisted living • Miscellaneous: Personal grooming, pets, club memberships Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they're as accurate and realistic as possible.

Decide when you'll retire To determine your total retirement needs, you can't just estimate how much annual income you need. You also have to estimate how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you'll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live, but with life expectancies on the rise, it's probably best to assume you'll live longer than you expect.

Identify your sources of retirement income Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement. Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall If you're lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic--there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions: • Try to cut current expenses so you'll have more money to save for retirement • Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss)

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• Lower your expectations for retirement so you won't need as much money (no beach house on the Riviera, for example) • Work part-time during retirement for extra income • Consider delaying your retirement for a few years (or longer)

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Taking Advantage of Employer-Sponsored Retirement Plans Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. If your employer offers such a plan and you're not participating in it, you should be. Once you're participating in a plan, try to take full advantage of it.

Understand your employer-sponsored plan Before you can take advantage of your employer's plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer's benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share: • Your employer automatically deducts your contributions from your paycheck. You may never even miss the money--out of sight, out of mind.

• You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year.

• With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pretax basis. Your contributions come off the top of your salary before your employer withholds income taxes.

• • Your 401(k) or 403(b) plan may let you make after-tax Roth contributions--there's no up-front tax benefit but qualified distributions are entirely tax free.

• Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.

• Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.

• You'll pay income taxes and possibly an early withdrawal penalty if you withdraw your money from the plan.

• You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.

• Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit. If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer's plan instead of somewhere else? One reason is that your pretax contributions to your employer's plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan--a big advantage if you're in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you'll pay income taxes on $90,000 instead of $100,000. (Roth contributions don't lower your current taxable income but qualified distributions of your contributions and earnings--that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die--are tax free.)

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Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren't taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer's plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, you participate in your employer's tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 8 percent per year. You're in the 28 percent tax bracket and contribute $10,000 to each account at the end of every year. You pay the yearly income taxes on Account B's earnings using funds from that same account. At the end of 30 years, Account A is worth $1,132,832, while Account B is worth only $757,970. That's a difference of over $370,000. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match If you can't max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you're vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer's match, you'll be surprised how much faster your balance grows. If you don't take advantage of your employer's generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6 percent of your salary. Each year, you contribute 6 percent of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer's plan could be one of your keys to a comfortable retirement. That's because over the long term, varying rates of return can make a big difference in the size of your balance.

Research the investments available to you. How have they performed over the long term? Have they held their own during down markets? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Finally, you may be able to change your investment allocations or move money between the plan's investments on specific dates during the year (e.g., at the start of every month or every quarter).

Know your options when you leave your employer When you leave your job, your vested balance in your former employer's retirement plan is yours to keep. You have several options at that point, including: • Taking a lump-sum distribution. This is often a bad idea, because you'll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you're giving up continued tax-deferred growth.

• Leaving your funds in the old plan, growing tax deferred (your old plan may not permit this if your balance is less than $5,000, or if you've reached the plan's normal retirement age--typically age 65).

This may be a good idea if you're happy with the plan's investments or you need time to decide what to do with your money.

• Rolling your funds over to an IRA or a new employer's plan if the plan accepts rollovers. This is often a smart move because there will be no income taxes or penalties if you do the rollover properly (your old

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plan will withhold 20 percent for income taxes if you receive the funds before rolling them over). Plus, your funds will keep growing tax deferred in the IRA or new plan.

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Borrowing or Withdrawing Money from Your 401(k) Plan If you have a 401(k) plan at work and need some cash, you might be tempted to borrow or withdraw money from it. But keep in mind that the purpose of a 401(k) is to save for retirement. Take money out of it now, and you'll risk running out of money during retirement. You may also face stiff tax consequences and penalties for withdrawing money before age 59½. Still, if you're facing a financial emergency--for instance, your child's college tuition is almost due and your 401(k) is your only source of available funds--borrowing or withdrawing money from your 401(k) may be your only option.

Plan loans To find out if you're allowed to borrow from your 401(k) plan and under what circumstances, check with your plan's administrator or read your summary plan description. Some employers allow 401(k) loans only in cases of financial hardship, but you may be able to borrow money to buy a car, to improve your home, or to use for other purposes.

Generally, obtaining a 401(k) loan is easy--there's little paperwork, and there's no credit check. The fees are limited too--you may be charged a small processing fee, but that's generally it.

How much can you borrow?

No matter how much you have in your 401(k) plan, you probably won't be able to borrow the entire sum.

Generally, you can't borrow more than $50,000 or one-half of your vested plan benefits, whichever is less. (An exception applies if your account value is less than $20,000; in this case, you may be able to borrow up to $10,000, even if this is your entire balance.)

What are the requirements for repaying the loan?

Typically, you have to repay money you've borrowed from your 401(k) within five years by making regular payments of principal and interest at least quarterly, often through payroll deduction. However, if you use the funds to purchase a primary residence, you may have a much longer period of time to repay the loan.

Make sure you follow to the letter the repayment requirements for your loan. If you don't repay the loan as required, the money you borrowed will be considered a taxable distribution. If you're under age 59½, you'll owe a 10 percent federal penalty tax, as well as regular income tax on the outstanding loan balance (other than the portion that represents any after-tax or Roth contributions you've made to the plan).

What are the advantages of borrowing money from your 401(k)?

• You won't pay taxes and penalties on the amount you borrow, as long as the loan is repaid on time • Interest rates on 401(k) plan loans must be consistent with the rates charged by banks and other commercial institutions for similar loans • The interest you pay on borrowed funds is generally credited to your own plan account; you pay interest to yourself, not to a bank or other lender

What are the disadvantages of borrowing money from your 401(k)?

• If you don't repay your plan loan when required, it will generally be treated as a taxable distribution.

• If you leave your employer's service (whether voluntarily or not) and still have an outstanding balance

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on a plan loan, you'll usually be required to repay the loan in full within 60 days. Otherwise, the outstanding balance will be treated as a taxable distribution, and you'll owe a 10 percent penalty tax in addition to regular income taxes if you're under age 59½.

• Loan interest is generally not tax deductible (unless the loan is secured by your principal residence).

• You'll lose out on any tax-deferred interest that may have accrued on the borrowed funds had they remained in your 401(k).

• Loan payments are made with after-tax dollars.

Hardship withdrawals Your 401(k) plan may have a provision that allows you to withdraw money from the plan while you're still employed if you can demonstrate "heavy and immediate" financial need and you have no other resources you can use to meet that need (e.g., you can't borrow from a commercial lender or from a retirement account and you have no other available savings). It's up to your employer to determine which financial needs qualify. Many employers allow hardship withdrawals only for the following reasons: • To pay the medical expenses of you, your spouse, your children, your other dependents, or your plan beneficiary • To pay the burial or funeral expenses of your parent, your spouse, your children, your other dependents, or your plan beneficiary • To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for you, your spouse, your children, your other dependents, or your plan beneficiary • To pay costs related to the purchase of your principal residence • To make payments to prevent eviction from or foreclosure on your principal residence • To pay expenses for the repair of damage to your principal residence after certain casualty losses Note: You may also be allowed to withdraw funds to pay income tax and/or penalties on the hardship withdrawal itself, if these are due.

Your employer will generally require that you submit your request for a hardship withdrawal in writing.

How much can you withdraw?

Generally, you can't withdraw more than the total amount you've contributed to the plan, minus the amount of any previous hardship withdrawals you've made. In some cases, though, you may be able to withdraw the earnings on contributions you've made. Check with your plan administrator for more information on the rules that apply to withdrawals from your 401(k) plan.

What are the advantages of withdrawing money from your 401(k) in cases of hardship?

The option to take a hardship withdrawal can come in very handy if you really need money and you have no other assets to draw on, and your plan does not allow loans (or if you can't afford to make loan payments).

What are the disadvantages of withdrawing money from your 401(k) in cases of hardship?

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• Taking a hardship withdrawal will reduce the size of your retirement nest egg, and the funds you withdraw will no longer grow tax deferred.

• Hardship withdrawals are generally subject to federal (and possibly state) income tax. A 10 percent federal penalty tax may also apply if you're under age 59½. (If you make a hardship withdrawal of your Roth 401(k) contributions, only the portion of the withdrawal representing earnings will be subject to tax and penalties.)

• You may not be able to contribute to your 401(k) plan for six months following a hardship distribution.

What else do I need to know?

• If your employer makes contributions to your 401(k) plan (for example, matching contributions) you may be able to withdraw those dollars once you become vested (that is, once you own your employer's contributions). Check with your plan administrator for your plan's withdrawal rules.

• If you are a qualified individual impacted by certain natural disasters, or if you are a reservist called to active duty after September 11, 2001, special rules may apply to you.

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Deciding What to Do with Your 401(k) Plan When You Change Jobs When you change jobs, you need to decide what to do with the money in your 401(k) plan. Should you leave it where it is, or take it with you? Should you roll the money over into an IRA or into your new employer's retirement plan?

As you consider your options, keep in mind that one of the greatest advantages of a 401(k) plan is that it allows you to save for retirement on a tax-deferred basis. When changing jobs, it's essential to consider the continued tax-deferral of these retirement funds, and, if possible, to avoid current taxes and penalties that can eat into the amount of money you've saved.

Take the money and run When you leave your current employer, you can withdraw your 401(k) funds in a lump sum. To do this, simply instruct your 401(k) plan administrator to cut you a check. Then you're free to do whatever you please with those funds. You can use them to meet expenses (e.g., medical bills, college tuition), put them toward a large purchase (e.g., a home or car), or invest them elsewhere.

While cashing out is certainly tempting, it's almost never a good idea. Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives. Not only will you miss out on the continued tax-deferral of your 401(k) funds, but you'll also face an immediate tax bite.

First, you'll have to pay federal (and possibly state) income tax on the money you withdraw (except for the amount of any after-tax contributions you've made). If the amount is large enough, you could even be pushed into a higher tax bracket for the year. If you're under age 59½, you'll generally have to pay a 10 percent premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception. (For instance, you're generally exempt from this penalty if you're 55 or older when you leave your job.) And, because your employer is also required to withhold 20 percent of your distribution for federal taxes, the amount of cash you get may be significantly less than you expect.

Note: Because lump-sum distributions from 401(k) plans involve complex tax issues, especially for individuals born before 1936, consult a tax professional for more information.

Note: If your 401(k) plan allows Roth contributions, qualified distributions of your Roth contributions and earnings will be free from federal income tax. However, no distributions will be qualified until 2011 at the earliest. If you receive a nonqualified distribution from a Roth 401(k) account only the earnings (not your original Roth contributions) will be subject to income tax and potential early distribution penalties.

Leave the funds where they are One option when you change jobs is simply to leave the funds in your old employer's 401(k) plan where they will continue to grow tax deferred.

However, you may not always have this opportunity. If your vested 401(k) balance is $5,000 or less, your employer can require you to take your money out of the plan when you leave the company. (Your vested 401(k) balance consists of anything you've contributed to the plan, as well as any employer contributions you have the right to receive.)

Leaving your money in your old employer's 401(k) plan may be a good idea if you're happy with the investment alternatives offered or you need time to explore other options. You may also want to leave the funds where they are temporarily if your new employer offers a 401(k) plan but requires new employees to work for the company for a certain length of time before allowing them to participate. When the waiting period is up, you can have the

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plan administrator of your old employer's 401(k) transfer your funds to your new employer's 401(k) (assuming the new plan accepts rollover contributions).

Transfer the funds directly to your new employer's retirement plan or to an IRA (a direct rollover) Just as you can always withdraw the funds from your 401(k) when you leave your job, you can always roll over your 401(k) funds to your new employer's retirement plan if the new plan allows it. You can also roll over your funds to a traditional IRA. You can either transfer the funds to a traditional IRA that you already have, or open a new IRA to receive the funds. There's no dollar limit on how much 401(k) money you can transfer to an IRA. You can also roll over ("convert") your 401(k) money to a Roth IRA. The taxable portion of your distribution from the 401(k) plan will be included in your income at the time of the rollover. (A special rule applies to 2010 conversions only--you can elect to include all of the resulting income on your 2010 federal tax return, or instead report half on your 2011 return, and half on your 2012 return.)

If you've made Roth contributions to your 401(k) plan you can only roll those funds over into another Roth 401(k) plan or Roth 403(b) plan (if your new employer's plan accepts rollovers) or to a Roth IRA. Generally, the best way to roll over funds is to have your 401(k) plan directly transfer your funds to your new employer's retirement plan or to an IRA you've established. A direct rollover is simply a transfer of assets from the trustee or custodian of one retirement savings plan to the trustee or custodian of another (a "trustee-to-trustee transfer"). It's a seamless process that allows your retirement savings to remain tax deferred without interruption.

Once you fill out the necessary paperwork, your 401(k) funds move directly to your new employer's retirement plan or to your IRA; the money never passes through your hands. And, if you directly roll over your 401(k) funds following federal rollover rules, no federal income tax will be withheld.

Note: In some cases, your old plan may mail you a check made payable to the trustee or custodian of your employer-sponsored retirement plan or IRA. If that happens, don't be concerned. This is still considered to be a direct rollover. Bring or mail the check to the institution acting as trustee or custodian of your retirement plan or IRA.

Have the distribution check made out to you, then deposit the funds in your new employer's retirement plan or in an IRA (an indirect rollover) You can also roll over funds to an IRA or another employer-sponsored retirement plan (if that plan accepts rollover contributions) by having your 401(k) distribution check made out to you and depositing the funds to your new retirement savings vehicle yourself within 60 days. This is sometimes referred to as an indirect rollover.

However, think twice before choosing this option. Because you effectively have use of this money until you redeposit it, your 401(k) plan is required to withhold 20 percent for federal income taxes on the taxable portion of your distribution (you get credit for this withholding when you file your federal income tax return for the year).

Unless you make up this 20 percent with out-of-pocket funds when you make your rollover deposit, the 20 percent withheld will be considered a taxable distribution, subject to regular income tax and generally a 10 percent premature distribution penalty (if you're under age 59½).

If you do choose to receive the funds through an indirect rollover, don't put off redepositing the funds. If you don't make your rollover deposit within 60 days, the entire amount will be considered a taxable distribution.

Which option is appropriate?

Assuming that your new employer offers a retirement plan that will accept rollover contributions, is it better to roll over your traditional 401(k) funds to the new plan or to a traditional IRA? Each retirement savings vehicle has advantages and disadvantages. Here are some points to consider:

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• A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options offered by the plan • A traditional IRA can be converted to a Roth IRA if you qualify • A 401(k) may offer a higher level of protection from creditors • A 401(k) may allow you to borrow against the value of your account, depending on plan rules • A 401(k) offers more flexibility if you want to contribute to the plan in the future Finally, no matter which option you choose, you may want to discuss your particular situation with a tax professional (as well as your plan administrator) before deciding what to do with the funds in your 401(k).

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Understanding IRAs An individual retirement arrangement (IRA) is a personal savings plan that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you're contributing to a 401(k) or other plan at work, you should also consider investing in an IRA.

What types of IRAs are available?

The two major types of IRAs are traditional IRAs and Roth IRAs. Both allow you to contribute as much as $5,000 in 2009 and 2010. You must have at least as much taxable compensation as the amount of your IRA contribution.

But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to make additional "catch-up" contributions. These folks can contribute up to $6,000 in 2009 and 2010.

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both give you a wide range of investment choices. However, there are important differences between these two types of IRAs. You must understand these differences before you can choose the type of IRA that's best for you.

Note: Special rules apply to qualified individuals impacted by certain natural disasters, taxpayers who receive certain Exxon Valdez settlement payments, certain former Enron employees, certain employees of bankrupt airlines, and certain reservists and national guardsmen called to active duty after September 11, 2001.

Learn the rules for traditional IRAs Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, saving you money in taxes.

If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income (modified adjusted gross income, or MAGI) and your income tax filing status: For 2010, if you are covered by a retirement plan at work, and: • Your filing status is single or head of household, and your MAGI is $56,000 or less, your traditional IRA contribution is fully deductible. Your deduction is reduced if your MAGI is more than $56,000 and less than $66,000, and you can't deduct your contribution at all if your MAGI is $66,000 or more.

• Your filing status is married filing jointly or qualifying widow(er), and your MAGI is $89,000 or less, your traditional IRA contribution is fully deductible. Your deduction is reduced if your MAGI is more than $89,000 and less than $109,000, and you can't deduct your contribution at all if your MAGI is $109,000 or more.

• Your filing status is married filing separately, your traditional IRA deduction is reduced if your MAGI is less than $10,000, and you can't deduct your contribution at all if your MAGI is $10,000 or more.

For 2010, if you are not covered by a retirement plan at work, but your spouse is, and you file a joint tax return, your traditional IRA contribution is fully deductible if your MAGI is $167,000 or less. Your deduction is reduced if your MAGI is more than $167,000 and less than $177,000, and you can't deduct your contribution at all if your MAGI is $177,000 or more.

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What happens when you start taking money from your traditional IRA? Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10 percent early withdrawal penalty if you're under age 59½, unless you meet one of the exceptions.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 70½. That's when you have to take your first required minimum distribution from the IRA. After that, you must take a distribution by the end of every calendar year until you die or your funds are exhausted. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you're required to in any year. However, if you withdraw less, you'll be hit with a 50 percent penalty on the difference between the required minimum and the amount you actually withdrew. (The Worker, Retiree and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.)

Learn the rules for Roth IRAs Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation in 2010 is at least $5,000, you may be able to contribute the full amount. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your MAGI and your income tax filing status: • If your filing status is single or head of household, and your MAGI for 2010 is $105,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $105,000 and less than $120,000, and you can't contribute to a Roth IRA at all if your MAGI is $120,000 or more.

• If your filing status is married filing jointly or qualifying widow(er), and your MAGI for 2010 is $167,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $167,000 and less than $177,000, and you can't contribute to a Roth IRA at all if your MAGI is $177,000 or more.

• If your filing status is married filing separately, your Roth IRA contribution is reduced if your MAGI is less than $10,000, and you can't contribute to a Roth IRA at all if your MAGI is $10,000 or more.

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax free, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply: • You have reached age 59½ by the time of the withdrawal • The withdrawal is made because of disability • The withdrawal is made to pay first-time home-buyer expenses ($10,000 lifetime limit) • The withdrawal is made by your beneficiary or estate after your death Qualified distributions will also avoid the 10 percent early withdrawal penalty. This ability to withdraw your funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even nonqualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made.

Another advantage of the Roth IRA is that there are no required distributions after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. Also, as long as you have taxable compensation and qualify, you can keep contributing to a Roth IRA after age 70½.

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Choose the right IRA for you Assuming you qualify to use both, which type of IRA is best for you? Sometimes the choice is easy. The Roth IRA will probably be a more effective tool if you don't qualify for tax-deductible contributions to a traditional IRA. However, if you can deduct your traditional IRA contributions, the choice is more difficult. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries.

But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you're still working (and probably in a higher tax bracket than you'll be in after you retire). A financial professional or tax advisor can help you pick the right type of IRA for you.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $5,000 for 2010 ($6,000 if you're age 50 or older).

Know your options for transferring your funds You can move funds from an IRA to the same type of IRA with a different institution (e.g., traditional to traditional, Roth to Roth). No taxes or penalty will be imposed if you arrange for the old IRA trustee to transfer your funds directly to the new IRA trustee. The other option is to have your funds distributed to you first and then roll them over to the new IRA trustee yourself. You'll still avoid taxes and penalty as long as you complete the rollover within 60 days from the date you receive the funds.

You may also be able to convert funds from a traditional IRA to a Roth IRA. This decision is complicated, however, so be sure to consult a tax advisor. He or she can help you weigh the benefits of shifting funds against the tax consequences and other drawbacks.

Note: The IRS has the authority to waive the 60-day rule for rollovers under certain limited circumstances, such as proven hardship.

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Annuities and Retirement Planning You may have heard that IRAs and employer-sponsored plans (e.g., 401(k)s) are the best ways to invest for retirement. That's true for many people, but what if you've maxed out your contributions to those accounts and want to save more? An annuity may be a good investment to look into.

Get the lay of the land An annuity is a tax-deferred investment contract. The details on how it works vary, but here's the general idea.

You invest your money (either a lump sum or a series of contributions) with a life insurance company that sells annuities (the annuity issuer). The period when you are funding the annuity is known as the accumulation phase.

In exchange for your investment, the annuity issuer promises to make payments to you or a named beneficiary at some point in the future. The period when you are receiving payments from the annuity is known as the distribution phase. Chances are, you'll start receiving payments after you retire.

Understand your payout options Understanding your annuity payout options is very important. Keep in mind that payments are based on the claims-paying ability of the issuer. You want to be sure that the payments you receive will meet your income needs during retirement. Here are some of the most common payout options: • You surrender the annuity and receive a lump-sum payment of all of the money you have accumulated.

• You receive payments from the annuity over a specific number of years, typically between 5 and 20. If you die before this "period certain" is up, your beneficiary will receive the remaining payments.

• You receive payments from the annuity for your entire lifetime. You can't outlive the payments (no matter how long you live), but there will typically be no survivor payments after you die.

• You combine a lifetime annuity with a period certain annuity. This means that you receive payments for the longer of your lifetime or the time period chosen. Again, if you die before the period certain is up, your beneficiary will receive the remaining payments.

• You elect a joint and survivor annuity so that payments last for the combined life of you and another person, usually your spouse. When one of you dies, the survivor receives payments for the rest of his or her life.

When you surrender the annuity for a lump sum, your tax bill on the investment earnings will be due all in one year. The other options on this list provide you with a guaranteed stream of income (subject to the claims-paying ability of the issuer). They're known as annuitization options because you've elected to spread payments over a period of years. Part of each payment is a return of your principal investment. The other part is taxable investment earnings. You typically receive payments at regular intervals throughout the year (usually monthly, but sometimes quarterly or yearly). The amount of each payment depends on the amount of your principal investment, the particular type of annuity, the length of the payout period, your age if payments for lifetime payments, and other factors.

Consider the pros and cons An annuity can often be a great addition to your retirement portfolio. Here are some reasons to consider investing in an annuity: • Your investment earnings are tax deferred as long as they remain in the annuity. You don't pay income tax on those earnings until they are paid out to you.

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• An annuity may be free from the claims of your creditors in some states.

• If you die with an annuity, the annuity's death benefit will pass to your beneficiary without having to go through probate.

• Your annuity can be a reliable source of retirement income, and you have some freedom to decide how you'll receive that income.

• You don't have to meet income tests or other criteria to invest in an annuity.

• You're not subject to an annual contribution limit, unlike IRAs and employer-sponsored plans. You can contribute as much or as little as you like in any given year.

• You're not required to start taking distributions from an annuity at age 70½ (the required minimum distribution age for IRAs and employer-sponsored plans). You can typically postpone payments until you need the income.

But annuities aren't for everyone. Here are some potential drawbacks: • Contributions to nonqualified annuities are made with after-tax dollars and are not tax deductible.

• Once you've elected to annuitize payments, you usually can't change them, but there are some exceptions.

• You can take your money from an annuity before you start receiving payments, but your annuity issuer may impose a surrender charge if you withdraw your money within a certain number of years (e.g., seven) after your original investment.

• You may have to pay other costs when you invest in an annuity (e.g., annual fees, investment management fees, insurance expenses).

• You may be subject to a 10 percent federal penalty tax (in addition to any regular income tax) if you withdraw your money from an annuity before age 59½, unless you meet one of the exceptions to this rule.

• Investment gains are taxed at ordinary income tax rates, not at the lower capital gains rate.

Choose the right type of annuity If you think that an annuity is right for you, your next step is to decide which type of annuity. Overwhelmed by all of the annuity products on the market today? Don't be. In fact, most annuities fit into a small handful of categories. Your choices basically revolve around two key questions.

First, how soon would you like annuity payments to begin? That probably depends on how close you are to retiring. If you're near retirement or already retired, an immediate annuity may be your best bet. This type of annuity starts making payments to you shortly after you buy the annuity, typically within a year or less. But what if you're younger, and retirement is still a long-term goal? Then you're probably better off with a deferred annuity.

As the name suggests, this type of annuity lets you postpone payments until a later time, even if that's many years down the road.

Second, how would you like your money invested? With a fixed annuity, the annuity issuer determines an interest rate to credit to your investment account. An immediate fixed annuity guarantees a particular rate, and your payment amount never varies. A deferred fixed annuity guarantees your rate for a certain number of years; your rate then fluctuates from year to year as market interest rates change. A variable annuity, whether immediate or deferred, gives you more control and the chance to earn a better rate of return (although with a greater potential for gain comes a greater potential for loss). You select your own investments from the subaccounts that the annuity issuer offers. Your payment amount will vary based on how your investments perform.

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Note:Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

Shop around It pays to shop around for the right annuity. In fact, doing a little homework could save you hundreds of dollars a year or more. Why? Rates of return and costs can vary widely between different annuities. You'll also want to shop around for a reputable, financially sound annuity issuer. There are firms that make a business of rating insurance companies based on their financial strength, investment performance, and other factors. Consider checking out these ratings.

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Choosing a Beneficiary for Your IRA or 401(k) Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. With retirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries. Although taxes shouldn't be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead you to make an incorrect choice.

In addition, if you're married, beneficiary designations may affect the size of minimum required distributions to you from your IRAs and retirement plans while you're alive.

Paying income tax on most retirement distributions Most inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due. However, that's not usually the case with 401(k) plans and IRAs. Beneficiaries pay ordinary income tax on distributions from 401(k) plans and traditional IRAs. With Roth IRAs and Roth 401(k)s, however, your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met. That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.

For example, if one of your children inherits $100,000 cash from you and another child receives your 401(k) account worth $100,000, they aren't receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to income tax at ordinary income tax rates, while the cash isn't subject to income tax when it passes to your child upon your death.

Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, the bottom line is different for each of them.

Naming or changing beneficiaries When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way--you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.

It's a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form to reflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal advice as needed.

Designating primary and secondary beneficiaries When it comes to beneficiary designation forms, you want to avoid gaps. If you don't have a named beneficiary who survives you, your estate may end up as the beneficiary, which is not always the best result.

Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as your primary beneficiary. If your primary beneficiary doesn't survive you or decides to decline the benefits (the tax term for this is a disclaimer), then your secondary (or "contingent") beneficiaries receive the benefits.

Having multiple beneficiaries You can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary will receive (the shares do not have to be equal). You should also state who will receive the proceeds

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should a beneficiary not survive you.

In some cases, you'll want to designate a different beneficiary for each account or have one account divided into subaccounts (with a beneficiary for each subaccount). You'd do this to allow each beneficiary to use his or her own life expectancy in calculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for your beneficiaries in paying income tax on distributions.

Avoiding gaps or naming your estate as a beneficiary There are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets.

First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may end up as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.

If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost. In addition, probate can mean paying attorney's and executor's fees and delaying the distribution of benefits.

Naming your spouse as a beneficiary When it comes to taxes, your spouse is usually the best choice for a primary beneficiary.

A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA, a surviving spouse can decide to treat your IRA as his or her own IRA. This can provide more tax and planning options.

If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you're alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.

Although naming a surviving spouse can produce the best income tax result, that isn't necessarily the case with death taxes. One possible downside to naming your spouse as the primary beneficiary is that it will increase the size of your spouse's estate for death tax purposes. That's because at your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased (note: special tax rules and requirements apply for a surviving spouse who is not a U.S. citizen). However, this may result in death tax or increased death tax when your spouse dies.

If your spouse's taxable estate for federal tax purposes at his or her death exceeds the applicable exclusion amount (formerly known as the unified credit), then federal death tax may be due at his or her death. The applicable exclusion amount is $3.5 million in 2009 ($2 million in 2008).

Naming other individuals as beneficiaries You may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates that your surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver. And if you live in one of the community property states, your spouse may have rights related to your IRA regardless of whether he or she is named as the primary beneficiary.

Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspouse beneficiary may be able to roll over all or part of your 401(k) benefits to an inherited IRA (plans are not required to offer this option until 2010).

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Naming a trust as a beneficiary You must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legal advice before designating a trust as a beneficiary.

Naming a charity as a beneficiary In general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However, after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of the noncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.

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Saving for Retirement and a Child's Education at the Same Time You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child's education at the same time can be a challenge. But take heart--you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started: For retirement: • How many years until you retire?

• Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what's your balance? Can you estimate what your balance will be when you retire?

• How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.)

• What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?

• Do you or your spouse expect to work part-time in retirement?

For college: • How many years until your child starts college?

• Will your child attend a public or private college? What's the expected cost?

• Do you have more than one child whom you'll be saving for?

• Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?

• Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child's college funding needs.

Figure out what you can afford to put aside each month After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you'll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change.

Once you've come up with a dollar amount, you'll need to decide how to divvy up your funds.

Retirement takes priority Though college is certainly an important goal, you should probably focus on your retirement if you have limited

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funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you'll miss out on years of tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there's no such thing as a retirement loan!

If possible, save for your retirement and your child's college at the same time Ideally, you'll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child's college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you'd have $18,415 in your child's college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)

If you're unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you're pursuing both goals at the same time doesn't necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

Help! I can't meet both goals If the numbers say that you can't afford to educate your child or retire with the lifestyle you expected, you'll have to make some sacrifices. Here are some things you can do: • Defer retirement: The longer you work, the more money you'll earn and the later you'll need to dip into your retirement savings.

• Work part-time during retirement.

• Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.

• Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.

• Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss).

• Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.

• Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don't feel guilty--a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.

• Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

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Can retirement accounts be used to save for college?

Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child's college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you're under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you'll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

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Investing for Major Financial Goals Go out into your yard and dig a big hole. Every month, throw $50 into it, but don't take any money out until you're ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn't it? But that's what investing without setting clear-cut goals is like. If you're lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set goals?

The first step in investing is defining your dreams for the future. If you are married or in a long-term relationship, spend some time together discussing your joint and individual goals. It's best to be as specific as possible. For instance, you may know you want to retire, but when? If you want to send your child to college, does that mean an Ivy League school or the community college down the street?

You'll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan).

You can then decide how much money you'll need to accumulate and which investments can best help you meet your goals.

Looking forward to retirement After a hard day at the office, do you ask, "Is it time to retire yet?" Retirement may seem a long way off, but it's never too early to start planning--especially if you want your retirement to be a secure one. The sooner you start, the more ability you have to let time do some of the work of making your money grow.

Let's say that your goal is to retire at age 65 with $500,000 in your retirement fund. At age 25 you decide to begin contributing $250 per month to your company's 401(k) plan. If your investment earns 6 percent per year, compounded monthly, you would have more than $500,000 in your 401(k) account when you retire. (This is a hypothetical example, of course, and does not represent the results of any specific investment.)

But what would happen if you left things to chance instead? Let's say you wait until you're 35 to begin investing.

Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with only about half the amount in the first example. Though it's never too late to start working toward your goals, as you can see, early decisions can have enormous consequences later on.

Some other points to keep in mind as you're planning your retirement saving and investing strategy: • Plan for a long life. Average life expectancies in this country have been increasing for many years. and many people live even longer than those averages. • Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments that, though more volatile, offer a higher potential for long-term return than do more conservative investments. Conversely, if you're nearing retirement, a greater portion of your nest egg might be devoted to investments focused on income and preservation of your capital. • Consider how inflation will affect your retirement savings. When determining how much you'll need to save for retirement, don't forget that the higher the cost of living, the lower your real rate of return on your investment dollars.

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Facing the truth about college savings Whether you're saving for a child's education or planning to return to school yourself, paying tuition costs definitely requires forethought--and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the more you're able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Consider these tips as well: • Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost of tuition at two-year and four-year public and private colleges and universities are widely available.

• Research financial aid packages that can help offset part of the cost of college. Although there's no guarantee your child will receive financial aid, at least you'll know what kind of help is available should you need it.

• Look into state-sponsored tuition plans that put your money into investments tailored to your financial needs and time frame. For instance, most of your dollars may be allocated to growth investments initially; later, as your child approaches college, more conservative investments can help conserve principal.

• Think about how you might resolve conflicts between goals. For instance, if you need to save for your child's education and your own retirement at the same time, how will you do it?

Investing for something big At some point, you'll probably want to buy a home, a car, maybe even that yacht that you've always wanted.

Although they're hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is common.

Because you don't have much time to invest, you'll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

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Understanding Defined Benefit Plans You may be counting on funds from a defined benefit plan to help you achieve a comfortable retirement. Often referred to as traditional pension plans, defined benefit plans promise to pay you a specified amount at retirement.

To help you understand the role a defined benefit plan might play in your retirement savings strategy, here's a look at some basic plan attributes. But since every employer's plan is a little different, you'll need to read the summary plan description, or SPD, provided by your company to find out the details of your own plan.

What are defined benefit plans?

Defined benefit plans are qualified employer-sponsored retirement plans. Like other qualified plans, they offer tax incentives both to employers and to participating employees. For example, your employer can generally deduct contributions made to the plan. And you generally won't owe tax on those contributions until you begin receiving distributions from the plan (usually during retirement). However, these tax incentives come with strings attached--all qualified plans, including defined benefit plans, must comply with a complex set of rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

How do defined benefit plans work?

A defined benefit plan guarantees you a certain benefit when you retire. How much you receive generally depends on factors such as your salary, age, and years of service with the company.

Each year, pension actuaries calculate the future benefits that are projected to be paid from the plan, and ultimately determine what amount, if any, needs to be contributed to the plan to fund that projected benefit payout. Employers are normally the only contributors to the plan. But defined benefit plans can require that employees contribute to the plan, although it's uncommon.

You may have to work for a specific number of years before you have a permanent right to any retirement benefit under a plan. This is generally referred to as "vesting." If you leave your job before you fully vest in an employer's defined benefit plan, you won't get full retirement benefits from the plan.

How are retirement benefits calculated?

Retirement benefits under a defined benefit plan are based on a formula. This formula can provide for a set dollar amount for each year you work for the employer, or it can provide for a specified percentage of earnings. Many plans calculate an employee's retirement benefit by averaging the employee's earnings during the last few years of employment (or, alternatively, averaging an employee's earnings for his or her entire career), taking a specified percentage of the average, and then multiplying it by the employee's number of years of service.

Note: Many defined benefit pension plan formulas also reduce pension benefits by a percentage of the amount of Social Security benefits you can expect to receive.

How will retirement benefits be paid?

Many defined benefit plans allow you to choose how you want your benefits to be paid. Payment options commonly offered include: • A single life annuity: You receive a fixed monthly benefit until you die; after you die, no further payments are made to your survivors. • A qualified joint and survivor annuity: You receive a fixed monthly benefit until you die; after you die,

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your surviving spouse will continue to receive benefits (in an amount equal to at least 50 percent of your benefit) until his or her death.

• A lump-sum payment: You receive the entire value of your plan in a lump sum; no further payments will be made to you or your survivors.

Choosing the right payment option is important, because the option you choose can affect the amount of benefit you ultimately receive. You'll want to consider all of your options carefully, and compare the benefit payment amounts under each option. Because so much may hinge on this decision, you may want to discuss your options with a financial advisor.

What are some advantages offered by defined benefit plans?

• Defined benefit plans can be a major source of retirement income. They're generally designed to replace a certain percentage (e.g., 70 percent) of your preretirement income when combined with Social Security.

• Benefits do not hinge on the performance of underlying investments, so you know ahead of time how much you can expect to receive at retirement.

• Most benefits are insured up to a certain annual maximum by the federal government through the Pension Benefit Guaranty Corporation (PBGC).

How do defined benefit plans differ from defined contribution plans?

Though it's easy to do, don't confuse a defined benefit plan with another type of qualified retirement plan, the defined contribution plan (e.g., 401(k) plan, profit-sharing plan). As the name implies, a defined benefit plan focuses on the ultimate benefits paid out. Your employer promises to pay you a certain amount at retirement and is responsible for making sure that there are enough funds in the plan to eventually pay out this amount, even if plan investments don't perform well.

In contrast, defined contribution plans focus primarily on current contributions made to the plan. Your plan specifies the contribution amount you're entitled to each year (contributions made by either you or your employer), but your employer is not obligated to pay you a specified amount at retirement. Instead, the amount you receive at retirement will depend on the investments you choose and how those investments perform.

Some employers offer hybrid plans. Hybrid plans include defined benefit plans that have many of the characteristics of defined contribution plans. One of the most popular forms of a hybrid plan is the cash balance plan.

What are cash balance plans?

Cash balance plans are defined benefit plans that in many ways resemble defined contribution plans. Like defined benefit plans, they are obligated to pay you a specified amount at retirement, and are insured by the federal government. But they also offer one of the most familiar features of a defined contribution plan: Retirement funds accumulate in an individual account (in this case, a hypothetical account).

This allows you to easily track how much retirement benefit you have accrued. And your benefit is portable. If you leave your employer, you can generally opt to receive a lump-sum distribution of your vested account balance.

These funds can be rolled over to an individual retirement account (IRA) or to your new employer's retirement plan.

What you should do now It's never too early to start planning for retirement. Your pension income, along with Social Security, personal savings, and investment income, can help you realize your dream of living well in retirement.

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Start by finding out how much you can expect to receive from your defined benefit plan when you retire. Your employer will send you this information every year. But read the fine print. Estimates often assume that you'll retire at age 65 with a single life annuity. Your monthly benefit could end up to be far less if you retire early or receive a joint and survivor annuity. Finally, remember that most defined benefit plans don't offer cost-of-living adjustments, so benefits that seem generous now may be worth a lot less in the future when inflation takes its toll.

Here are some other things you can do to make the most of your defined benefit plan: • Read the summary plan description. It provides details about your company's pension plan and includes important information, such as vesting requirements and payment options. Address questions to your plan administrator if there's anything you don't understand.

• Review your account information, making sure you know what benefits you are entitled to. Do this periodically, checking your Social Security number, date of birth, and the compensation used to calculate your benefits, since these are common sources of error.

• Notify your plan administrator of any life changes that may affect your benefits (e.g., marriage, divorce, death of spouse).

• Keep track of the pension information for each company you've worked for. Make sure you have copies of pension plan statements that accurately reflect the amount of benefits you're entitled to receive.

• Watch out for changes. Employers are allowed to change and even terminate pension plans, but you will receive ample notice. The key is, read all notices you receive.

• Assess the impact of changing jobs on your pension. Consider staying with one employer at least until you're vested. Keep in mind that the longer you stay with one employer, the more you're likely to receive at retirement.

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Understanding Social Security Over 55 million people today receive some form of Social Security benefits, including 90 percent of retired workers over age 65. (Source: Fast Facts & Figures About Social Security, 2009) But Social Security is more than just a retirement program. Its scope has expanded to include other benefits as well, such as disability, family, and survivor's benefits.

How does Social Security work?

The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most--at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you're applying for.

Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service. The SSA uses your Social Security number to track your earnings and your benefits.

Finding out what earnings have been reported to the SSA and what benefits you can expect to receive is easy.

Just check out your Social Security Statement, mailed by the SSA annually to anyone age 25 or older who is not already receiving Social Security benefits. You'll receive this statement each year about three months before your birthday. It summarizes your earnings record and estimates the retirement, disability, and survivor's benefits that you and your family members may be eligible to receive. You can also order a statement at the SSA website, at your local SSA office, or by calling (800) 772-1213.

Social Security eligibility When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivor's benefits.

Your retirement benefits If you were born before 1938, you will be eligible for full retirement benefits at age 65. If you were born in 1938 or later, the age at which you are eligible for full retirement benefits will be different. That's because full retirement age is gradually increasing to age 67.

But you don't have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is often advantageous: Although you'll receive a reduced benefit if you retire early, you'll receive benefits for a longer period than someone who retires at full retirement age.

You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 6 to 8 percent higher. That's because you'll receive a delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70. The amount of this credit varies, depending on your year of birth.

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Disability benefits If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you're only temporarily disabled, don't expect to receive Social Security disability benefits--benefits won't begin until the sixth full month after the onset of your disability.

And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.

Family benefits If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include: • Your spouse age 62 or older, if married at least 1 year • Your former spouse age 62 or older, if you were married at least 10 years • Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled • Your children under age 18, if unmarried • Your children under age 19, if full-time students (through grade 12) or disabled • Your children older than 18, if severely disabled Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member's benefit will be reduced proportionately. Your benefit won't be affected.

Survivor's benefits When you die, your family members may qualify for survivor's benefits based on your earnings record. These family members include: • Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled) • Your widow(er) or ex-spouse at any age, if caring for your child who is under under 16 or disabled • Your children under 18, if unmarried • Your children under age 19, if full-time students (through grade 12) or disabled • Your children older than 18, if severely disabled • Your parents, if they depended on you for at least half of their support Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.

Applying for Social Security benefits You can apply for Social Security benefits in person at your local Social Security office. You can also begin the process by calling (800) 772-1213 or by filling out an on-line application on the Social Security website. The SSA suggests that you contact its representative the year before the year you plan to retire, to determine when you

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should apply and begin receiving benefits. If you're applying for disability or survivor's benefits, apply as soon as you are eligible.

Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship.

The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don't already have.

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Social Security Retirement Benefits Social Security was originally intended to provide older Americans with continuing income after retirement.

Today, though the scope of Social Security has been widened to include survivor's, disability, and other benefits, retirement benefits are still the cornerstone of the program.

How do you qualify for retirement benefits?

When you work and pay Social Security taxes (FICA on some pay stubs), you earn Social Security credits. You can earn up to 4 credits each year. If you were born after 1928, you need 40 credits (10 years of work) to be eligible for retirement benefits.

How much will your retirement benefit be?

Your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily. Your age at the time you start receiving benefits also affects your benefit amount. Although you can retire early at age 62, the longer you wait to retire (up to age 70), the higher your retirement benefit.

You can check your earnings record and get an estimate of your future Social Security benefits by filling out a request at your local Social Security office or by visiting the Social Security Administration (SSA) website. You can also find this information on your Social Security Statement, which the SSA mails annually to every worker over age 25. You will receive this statement about three months before your birthday. Review it carefully to make sure your paid earnings were accurately reported--mistakes are common. Call the SSA at (800) 772-1213 for more information.

Retiring at full retirement age If you retire at full retirement age, you'll receive an unreduced retirement benefit. Your full retirement age depends on the year in which you were born.

If you were born in: Your full retirement age is: 1937 or earlier

65

1938

65 and 2 months

1939

65 and 4 months

1940

65 and 6 months

1941

65 and 8 months

1942

65 and 10 months

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

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66 and 10 months

1960 and later

67

Retiring early will reduce your benefit You can begin receiving Social Security benefits before your full retirement age, as early as age 62. However, if you retire early, your Social Security benefit will be less than if you wait until your full retirement age to begin receiving benefits. Your retirement benefit will be reduced by 5/9ths of 1 percent for every month between your retirement date and your full retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. For example, if your full retirement age is 67, you'll receive about 30 percent less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent--you won't be eligible for a benefit increase once you reach full retirement age.

Still, receiving early Social Security retirement benefits makes sense for many people. Even though you'll receive less per month than if you wait until full retirement age to begin receiving benefits, you'll receive benefits several years earlier.

Delaying retirement will increase your benefit For each month that you delay receiving Social Security retirement benefits past your full retirement age, your benefit will increase by a certain percentage. This percentage varies depending on your year of birth. For example, if you were born in 1936, your benefit will increase 6 percent for each year that you delay receiving benefits. If you were born in 1943 or later, your benefit will increase 8 percent for each year that you delay receiving benefits. In addition, working past your full retirement age has another benefit: It allows you to add years of earnings to your Social Security record. As a result, you may receive a higher benefit when you do retire, especially if your earnings are higher than in previous years.

Working may affect your retirement benefit You can work and still receive Social Security retirement benefits, but the income that you earn before you reach full retirement age may affect the amount of benefit that you receive. Here's how: • If you're under full retirement age: $1 in benefits will be deducted for every $2 in earnings you have above the annual limit • In the year you reach full retirement age: $1 in benefits will be deducted for every $3 you earn over the annual limit (a different limit applies here) until the month you reach full retirement age Once you reach full retirement age, you can work and earn as much income as you want without reducing your Social Security retirement benefit.

Retirement benefits for qualified family members Even if your spouse has never worked outside your home or in a job covered by Social Security, he or she may be eligible for spousal benefits based on your Social Security earnings record. Other members of your family may also be eligible. Retirement benefits are generally paid to family members who relied on your income for financial support. If you're receiving retirement benefits, the members of your family who may be eligible for family benefits include: • Your spouse age 62 or older, if married at least one year • Your former spouse age 62 or older, if you were married at least 10 years • Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled

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• Your children under age 18, if unmarried • Your children under age 19, if full-time students (through grade 12) or disabled • Your children older than 18, if severely disabled Your eligible family members will receive a monthly benefit that is as much as 50 percent of your benefit.

However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member's benefit will be reduced proportionately. Your benefit won't be affected.

How do you sign up for Social Security?

You should apply for benefits at your local Social Security office or on-line two or three months before your retirement date. However, the SSA suggests that you contact your local office a year before you plan on applying for benefits to discuss how retiring at a certain age can affect your finances. Fill out an application on the SSA website, or call the SSA at (800) 772-1213 for more information on the application process.

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Tax-Deferred Annuities: Are They Right for You? Tax-deferred annuities can be a valuable tool, particularly for retirement savings. However, they are not appropriate for everyone.

Five questions to consider Think about each of the following questions. If you can answer yes to all of them, an annuity may be a good choice for you.

1. Are you making the maximum allowable pretax contribution to employer-sponsored retirement plans (a 401(k) or 403(b) plan through your employer, or a Keogh plan or SEP-IRA if you are self-employed), or to a deductible traditional IRA? These are tax-advantaged vehicles that should be fully utilized before you contribute to an annuity.

2. Are you making the maximum allowable contribution to a Roth IRA, Roth 401(k), or Roth 403(b), which provide additional tax benefits not available in a nonqualified annuity?

3. Will you need more retirement income than your current retirement plan(s) will provide? If you begin making the maximum allowable contributions to both a qualified plan and an IRA in your 30s or early 40s, you may have enough retirement income without an annuity.

4. Are you sure you won't need the money until at least age 59½? Withdrawals from an annuity made before this age are usually subject to a 10 percent early withdrawal penalty tax on earnings levied by the IRS. 5. Will you take distributions from your annuity on an ongoing basis throughout your retirement? You typically have the option of making a lump-sum withdrawal from an annuity, but this is almost always a bad idea. If you do, you'll have to pay taxes on all of the earnings that have built up over the years.

If you take gradual distributions, you pay taxes a little at a time, allowing the rest of the money to continue growing tax deferred. In addition, if the annuity is nonqualified and you elect to receive an annuity payout, you will enjoy an exclusion allowance on each payment, in which a portion of each payment is considered a return of principal and is not taxable.

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Annuity Basics An annuity is a contract between you, the purchaser or owner, and an insurance company, the annuity issuer. In its simplest form, you pay money to an annuity issuer, and the issuer pays out the principal and earnings back to you or to a named beneficiary. Life insurance companies first developed annuities to provide income to individuals during their retirement years.

One of the attractive aspects of an annuity is that its earnings are tax deferred until you begin to receive payments back from the annuity issuer. In this respect, an annuity is similar to a qualified retirement plan. Over a long period of time, your investment in an annuity can grow substantially larger than if you had invested money in a comparable taxable investment. Like a qualified retirement plan, a 10 percent tax penalty may be imposed if you begin withdrawals from an annuity before age 59½. Unlike a qualified retirement plan, contributions to an annuity are not tax deductible, and taxes are paid only on the earnings when distributed.

Four parties to an annuity contract There are four parties to an annuity contract: the annuity issuer, the owner, the annuitant, and the beneficiary.

The annuity issuer is the company (e.g., an insurance company) that issues the annuity. The owner is the individual or other entity who buys the annuity from the annuity issuer and makes the contributions to the annuity.

The annuitant is the individual whose life will be used as the measuring life for determining the timing and amount of distribution benefits that will be paid out. The owner and the annuitant are usually the same person but do not have to be. Finally, the beneficiary is the person who receives a death benefit from the annuity at the death of the annuitant.

Two distinct phases to an annuity There are two distinct phases to an annuity: (1) the accumulation (or investment) phase and (2) the distribution phase.

The accumulation (or investment) phase is the time period when you add money to the annuity. When using this option, you'll have purchased a deferred annuity. You can purchase the annuity in one lump sum (known as a single premium annuity), or you make investments periodically, over time.

The distribution phase is when you begin receiving distributions from the annuity. You have two general options for receiving distributions from your annuity. Under the first option, you can withdraw some or all of the money in the annuity in lump sums.

The second option (commonly referred to as the guaranteed income or annuitization option) provides you with a guaranteed income stream from the annuity for your entire lifetime (no matter how long you live) or for a specific period of time (e.g., 10 years). (Guarantees are based on the claims-paying ability of the issuing insurance company.) This option can be elected at any time on your deferred annuity. Or, if you want to invest in an annuity and start receiving payments within the first year, you'll purchase what is known as an immediate annuity.

You can also elect to receive the annuity payments over both your lifetime and the lifetime of another person.

This option is known as a joint and survivor annuity. Under a joint and survivor annuity, the annuity issuer promises to pay you an amount of money on a periodic basis (e.g., monthly, quarterly, or yearly). The amount you receive for each payment period will depend on how much money you have in the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin the annuitization phase. The length of the distribution period will also affect how much you receive. If you are age 65 and elect to receive annuity distributions over your entire lifetime, the amount you will receive with each payment will be less than if you had elected to receive annuity distributions over five years.

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When is an annuity appropriate?

It is important to understand that annuities can be an excellent tool if you use them properly. Annuities are not right for everyone.

Annuity contributions are not tax deductible. That's why most experts advise funding other retirement plans first.

However, if you have already contributed the maximum allowable amount to other available retirement plans, an annuity can be an excellent choice. There is no limit to how much you can invest in an annuity, and like other retirement plans, the funds are allowed to grow tax deferred until you begin taking distributions.

Annuities are designed to be very-long-term investment vehicles. In most cases, you'll pay a penalty for early withdrawals. And if you take a lump-sum distribution of your annuity funds within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. As long as you're sure you won't need the money until at least age 59½, an annuity is worth considering. If your needs are more short term, you should explore other options.

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Shopping for an Annuity Although many insurance companies offer annuities with the same (or at least similar) features, that doesn't mean that all products and all companies are the same. As with all financial products, you should shop around and compare. Here are some things to consider when shopping for annuities.

Financial stability Moody's, Standard & Poor's, and A. M. Best all rate insurance companies for financial stability and customer satisfaction. When purchasing an annuity, it is best to consider buying only from companies that have received high ratings from each of these services.

If you're buying a variable annuity (as opposed to a fixed annuity), you can be less concerned about the financial stability of the issuing company, because assets held in the subaccounts of a variable annuity are not subject to the claims of the creditors of the issuing annuity company.

Get the best performer When shopping around for a fixed annuity, the one offering the highest initial interest rate is not necessarily the best value.

Often, companies will offer a very high initial rate, guaranteed for one or more years, as a way to induce a sale.

After the guarantee period ends, the rate drops steeply. Ask the issuers to provide the historical returns for their annuities that they have paid over the last 10 to 20 years. Those returns are a better indicator of what to expect in the future from that company.

Also, check the guaranteed minimum interest rate. Although 3 to 4 percent is common in today's market, you may be able to find a company that offers an annuity with a higher minimum rate guarantee.

Compare fees Annuity products in general, and variable annuities in particular, have a number of fees structured into the product. These fees can vary greatly from sponsor to sponsor and from product to product.

Higher fees can offset a higher rate of return if the fees are significant enough. Therefore, the smart consumer factors the amount of fees that will be deducted from the investment return before making a final decision.

Watch out for surrender charges It's common for annuities to have contingent deferred sales charges, commonly known as surrender charges, that are assessed when you surrender some or all of the annuity within a certain number of years after purchasing the annuity. Typically, the surrender charge will begin at about 7 percent and decrease by 1 percent annually. Ideally, your surrender charge is not longer than the interest rate guarantee on a fixed annuity. If it's not, and the insurance company drastically reduced the interest rate it is paying, you may find yourself with the choice of keeping the annuity and earning a low rate, or surrendering it and paying a surrender charge.

Many variable annuities can be purchased without a surrender charge. However, you can expect to pay slightly higher annual fees when buying these annuities.

Do your homework Many resources are available that allow customers to compare products and features. Several websites, for

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example, list competing products and features. Also, several publications that you might find in your local library offer this information, usually updated on a monthly basis. Since you will have to purchase your annuity through a licensed broker in any event, you may want to consult your investment advisor, stockbroker, or insurance professional to see what they can offer.

Note:Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

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Life Insurance at Various Life Stages Your need for life insurance changes as your life changes. When you're young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let's look at how your life insurance needs change throughout your lifetime.

Footloose and fancy-free As a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority.

Some would argue that you should buy life insurance now, while you're healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums.

If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums.

Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.

Going to the chapel Married couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other.

Once you buy a house, the situation begins to change. Even if both spouses have well-paying jobs, the burden of a mortgage may be more than the surviving spouse can afford on a single income. Credit card debt and other debts can contribute to the financial strain.

To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected.

Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.

Your growing family When you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate.

Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate

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costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths.

Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.

Moving up the ladder For many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It's important to review your life insurance coverage any time you leave an employer.

Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere.

Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.

Single again If you and your spouse divorce, you'll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex.

If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you'll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can't come to terms, the court will make the decisions for you.

Your retirement years Once you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it's also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.

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Cash Value Life Insurance Cash value, or permanent, life insurance is life insurance that is designed to be kept until your death--whenever that may be. Part of your premium pays for the "pure" insurance coverage and expenses, and the balance is held by the insurance company in a cash value account. The type of permanent life insurance you buy (e.g., whole, universal, variable) will influence the pace at which the cash value portion of your policy grows. The interest and earnings grow tax deferred until you withdraw the funds, and may be part of the income-tax-free death benefit if you die. However, these policies may require a higher cash outlay than term life policies.

Who should consider cash value life insurance?

Cash value life insurance is well suited to cover long-term needs, because coverage continues for the rest of your life. You won't need to renew your policy periodically, nor will you need to provide proof of insurability (e.g., a medical exam) once the policy is in place. Cash value insurance allows you to lock in a premium schedule, so you won't have to worry about rising premiums as you get older or your health deteriorates.

Advantages of cash value life insurance As with any life insurance policy, the purpose of cash value insurance is to provide adequate financial resources for your surviving loved ones in the event of your premature death. Knowing that this protection is in place may allow you to sleep a little easier at night.

A cash value policy is similar to an annuity in this respect. All of the interest and earnings on the policy's investments are allowed to grow free from income taxes until you surrender the policy or begin to withdraw your funds. Depending on the amount credited to the cash value account, you can accumulate a substantial amount of equity in your cash value policy over a period of years.

Generally, you'll have the right to take a loan from the insurance company, secured by the cash value in your policy. A fixed or variable interest rate will be charged. Keep in mind, however, that if you take a loan against your cash value, the death benefit available to your survivors will be reduced by the amount of the loan. In addition, policy loans may reduce available cash value and can cause your policy to lapse. Finally, you could face tax consequences if you surrender the policy with an outstanding loan against it.

With most cash value life insurance, you can take withdrawals from your cash value account. Policy withdrawals may be tax free up to your basis in the policy (the amount you've paid into the policy in premiums). As with loans, the amount of the withdrawal from your cash value account will reduce the death benefit available to your survivors, as well as the available cash value, in some cases by an amount greater than the withdrawal amount.

Different tax rules apply to withdrawals and loans from cash values if the policy is a Modified Endowment Contract. In that case, withdrawals and loans are considered made from earnings first, and would be subject to income tax.

Disadvantages of cash value life insurance The premiums for cash value insurance usually cost more than for a comparable amount of term insurance in the early years of the policy. The reason is that with a cash value policy, you're initially paying more than is currently needed to pay for the insurance, so that you can build a fund (the cash value account) to help offset the higher insurance costs you'll need to pay when you're older.

If you buy a variable life insurance policy, the underlying investments in the cash value account expose you to the possibility of financial loss as well as financial gain. It all depends on how those investments fare. Any losses will cut directly into your cash value account and may affect the amount of the death benefit, although a minimum death benefit is usually guaranteed. (Guarantees are subject to the claims-paying ability of the insurer.)

Note:

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Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

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How Does Cash Value in a Life Insurance Policy Really Work?

When you own cash value life insurance, your premium payments are allocated three ways. First, a portion of each premium pays for the actual insurance costs. Like term insurance, a specific cost is associated with the policy's death benefit, based on your age, health, and other underwriting criteria. Second, a portion pays for the insurance company's operating costs and profits. The remainder goes toward the policy's cash value.

What is cash value?

Term insurance charges an increasing premium (annually or in bands) to reflect the fact that the insured is aging and, each year, more likely to die. Cash value life insurance has a level premium that is larger than necessary in the early years of the policy to offset the increased costs of insuring the individual in the later years. This excess premium is invested and kept in an account known as the cash value account. In the event that you surrender the policy before death, this excess premium and its earnings are returned to you.

Cash value, by any other name...

Since cash value life insurance, also known as permanent life insurance, comes in many product varieties, people often get confused. Whole life, variable life, universal life, and variable universal life are among the most common cash value life insurance products found in today's marketplace. All of these policies operate in much the same fashion. For the purposes of this discussion, where they differ is in how the cash value is invested.

How cash value grows We've already said that a portion of every premium payment goes toward your policy's cash value. So, it's easy to understand that the cash value of a policy will grow as additional premiums are made. The cash value of a policy may also grow because of earnings.

Whole life policies offer "guaranteed" cash value accounts that increase based on a formula determined by the insurance company. (Guarantees are subject to the claims-paying ability of the insurer.) Universal life policies offer cash value accounts that track current interest rates. Variable life policies allow their owners to invest in accounts that operate like mutual funds, meaning that their cash value accounts can be invested in bond, stock, and other funds, known as subaccounts. The cash value will grow or decline based on the performance of the underlying subaccounts.

The amount of your premium that goes toward cash value decreases over time Over time, the amount that you contribute from each premium toward cash value decreases, because the cost of insuring you increases every year. The pattern is similar to what happens with a mortgage. In the early years of a home loan, you pay mostly interest; in the later years, you pay mostly principal.

Let's take a very simplified example and assume you're paying a $25-per-month premium for cash value insurance. In the early years of the policy, it costs relatively little to insure you--say $5 a month--because your odds of dying prematurely are low. In the later years of the policy, the cost to insure you is much greater--say $20 a month--because the insurance company knows that the odds are much greater that you will die as you grow older.

The cash value part of your premium behaves just the opposite of the insurance component. In the early years of the policy, your cash value can grow quickly since more of your premium is available for cash value. In the later years, the cost of insurance consumes more of your premium, so less is left over for cash value.

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The role of cash value You probably understand that, as you grow older, the cost of insuring your life gets more expensive. That's why a term insurance policy will generally cost you a great deal more at age 50 than at age 30. With cash value insurance, the insurance company looks ahead and factors in the increasing costs of insuring you as you grow older. The insurance company calculates a premium amount that will cover the anticipated increase in insuring your life. Cash value plays a central role in this calculation.

As the cash value of your policy grows, the amount that the insurance company needs to pay out as a pure death benefit decreases. That's because part of the policy payout upon your death comes from the cash value of the policy. The larger the cash value, the greater the percentage of the policy that can come from the cash value. In effect, to avoid increasing premiums as you get older, you're setting aside funds now to make up the difference.

An example Although grossly oversimplified, cash value works something like this: Assume that a policy will pay $1 million upon your death. You make monthly premium payments, and each month a portion of your premium is applied to the cash value of the policy. After 30 years, the cash value of the policy is equal to $500,000. Since the policy will pay $1 million upon your death, and the policy already has a cash value of $500,000, the insurance cost needs to cover only the remaining $500,000.

Ten years later, the cash value is equal to $750,000. Because you're 40 years older than you were when you bought the policy, the pure insurance cost of insuring your life is significantly higher now. However, because of the cash value, your policy is really insuring only $250,000. The rest of your policy's payout will come from cash value.

Note:Variable life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company issuing the policy. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life insurance policy.

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How can we possibly save for retirement and our child's college education at the same time?

Question: How can we possibly save for retirement and our child's college education at the same time?

Answer: It's seldom easy to achieve a balance between saving for your retirement and saving for the ever-increasing costs of a college education within your present income. Yet it's imperative that you save for both at the same time. To postpone saving for your retirement means missing out on years of tax-deferred growth and playing a near-impossible game of catch-up. To accomplish both goals, you may need to compromise.

The first step is to thoroughly examine your funding needs for both college and retirement. On the retirement side, remember to include the estimated value of any employer pension plans, as well as your Social Security benefits. This evaluation will likely prompt you to examine some deeply held beliefs about your financial goals.

For example, is it important that you travel regularly in retirement, or is it more important that your child attend a prestigious Ivy League college?

If you discover that you can't afford to save for both goals, the second step is to consider some compromises: • Defer your retirement and work longer.

• Reduce your standard of living, now or in retirement.

• Increase the family income by seeking a better paying position in your present career, getting a second job, or having a previously stay-at-home spouse join the work force. Beware, though, of potential drawbacks like day-care costs, commuting costs, and tax disadvantages on the increased income.

• Seek out more aggressive investments (but beware of the risks).

• Expect your child to contribute more money to college. Some parents may find it difficult to accept, but the majority of college students finance a portion of their education with student loans.

• Investigate less expensive colleges. You may find that some less expensive state universities have more to offer in certain programs than their pricey private counterparts.

The third step is to re-evaluate your plan from time to time as your circumstances and wishes change.

Remember, the important thing is to earmark a portion of your present income for both goals and do the best you can.

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How late is too late to start saving for retirement?

Question: How late is too late to start saving for retirement?

Answer: This question is difficult because the answer depends on your income and assets, your goals for retirement, and many other factors. Ideally, you should begin saving for retirement in your 20s. More time to save enhances your chances of having the kind of retirement lifestyle you want.

If you're in your 40s or older and haven't saved much (or anything) yet, you may face a challenge in building the retirement fund you need. The shorter your time frame, the less room you have for error. But don't panic--it's never too late to start saving. You may still be able to secure a comfortable retirement for yourself, but you may have to make some tough choices to do so. Here are a few tips if you're getting a late start: • Save as much as possible: The more you save, the more you'll have when you retire. Try to maximize your contributions to IRAs, 401(k)s, and other tax-advantaged vehicles. Then supplement your retirement fund with mutual funds, savings accounts, and other investments.

• Cut current expenses: Chances are, not all of your expenses are absolutely essential. If you can wipe out or trim certain expenses, such as videos, expensive coffees, and daily lunches out, you'll free up more money to invest for retirement.

• Invest more aggressively: This can help you build a large retirement fund in a short time. Certain stocks and mutual funds may enable your savings to grow more rapidly. The tradeoff: These investments are subject to market risk which will expose you to greater volatility, including a possible loss of principal.

• Delay retirement: You may have no choice but to delay your retirement until after age 65. This strategy will buy you more time to build your nest egg. Plus, the more years you work, the fewer years of retirement you'll have to fund.

• Rethink your retirement goals: Set more realistic goals for your retirement (no beach house on the Riviera, for example). That way, you won't need as much money to fund your retirement.

If you fear you're getting too late a start, or you're not sure where to start, consult a financial professional. He or she can help you map out a plan to bridge the gap between where you are now and where you need to be when you retire.

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Can I set up a traditional IRA? Answer: Almost anyone can set up a traditional IRA. The only requirements are that you must have earned income (typically, salary or wages from your job) and be under age 70½ in order to put money into an IRA. Beyond that, the basic mechanics of setting up an IRA are pretty straightforward. An IRA is typically established with a bank, insurance or investment company, or other financial institution with an initial investment of as little as $50. It's as simple as picking an institution, completing the required paperwork, and making an opening deposit. The only potentially difficult steps are selecting specific investment vehicles to fund your IRA and designating your beneficiary.

In 2009 and 2010, you can contribute a total of $5,000 to all the IRAs you own (traditional and Roth). Married couples may contribute $5,000 per spouse under certain conditions. In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 in 2009 and 2010. Your annual contribution can be made as a lump-sum payment or a series of payments, and can be made up until April 15 of the following year.

Although practically anyone with earned income who is under age 70½ can contribute the full $5,000 to an IRA in 2010, your ability to deduct contributions will depend on several factors (e.g., your adjusted gross income, your tax filing status, and whether you or your spouse is covered by an employer-sponsored plan). You may be able to deduct all, a portion, or none of your IRA contribution for a given tax year. You may even qualify for a partial tax credit.

Note that this discussion applies only to traditional IRAs. Roth IRAs are subject to special rules of their own.

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How aggressive should I be when I invest for retirement?

Question: How aggressive should I be when I invest for retirement?

Answer: It depends. The right answer in your case will depend on a number of key factors. These include, among others, your income and assets, your attitude toward risk, whether you have access to an employer-sponsored plan at work, the age at which you plan to retire, and your projected expenses during retirement. But it's possible to lay down some guidelines that may be of help to you.

The conventional wisdom used to be that you should invest aggressively when you're young and then move gradually toward a more conservative approach. By the time you retired, you would probably end up with a portfolio made up mostly of high-grade bonds and other low-risk investments. This model may have worked at one time, but the retirement landscape has changed dramatically in the past 20 years or so. As a result, many of our basic assumptions about retirement planning have been overturned.

The dwindling number of traditional pension plans and concerns about Social Security have led people to take greater responsibility for their own retirement. Investing more aggressively over the long term has become common as people realize that, without anyone else to take care of them, they need to build the largest retirement nest egg they possibly can. In fact, many people these days primarily use growth vehicles (e.g., certain stocks and mutual funds) for their investment portfolios and tax-deferred retirement plans (e.g., 401(k)s and IRAs).

Other factors have changed the way we think about and invest for retirement as well. People tend to retire younger, live longer, and do more during retirement than they used to. With the likelihood that you will have well over 20 years of activity to fund, it's probably a good idea to invest more aggressively for retirement than previous generations did. And there's no reason to switch over to fixed-income securities upon reaching retirement. Many financial planners suggest that you keep a suitably balanced portfolio, including some of your assets in growth-oriented investments, even after you retire.

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What are the rules for IRA contributions?

Answer: It depends on what kind of IRA you're talking about. Traditional IRAs and Roth IRAs are each subject to different contribution rules.

You're allowed to contribute up to $5,000 to a traditional IRA in 2009 and 2010, as long as you're under age 70½ and you have earned income. In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 in 2009 and 2010. You can make your annual contribution up to April 15 of the following year, either in a series of payments or in one lump sum. The beauty is that practically anyone who has a paying job can set up and contribute to a traditional IRA. Also, if you meet certain conditions, you may be able to contribute an additional $5,000 in 2009 and 2010 to an IRA in your spouse's name (plus an additional $1,000 catch-up contribution if your spouse is age 50 or older). However, whether or not you can deduct your traditional IRA contributions will depend on several factors, such as your income, your tax filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. You may even qualify for a partial tax credit.

Roth IRAs are in some ways the opposite of traditional IRAs. Contributions to Roth IRAs are never tax deductible, but a tax credit may be available and qualifying distributions will be tax free. Also, even though the same dollar caps on yearly contributions apply to Roth IRAs ($5,000 in 2009 and 2010, $6,000 if age 50 or older), not everyone will qualify to take full advantage of a Roth IRA. The amount you can contribute to a Roth IRA (if anything) will be based on your income and filing status. If you do qualify, you may be able to continue contributing to a Roth IRA after age 70½--a feature traditional IRAs don't offer. As with traditional IRAs, you may be able to contribute to a Roth IRA on behalf of your spouse. However, your contribution to a Roth IRA for any tax year must be reduced by contributions made to other IRAs during the same year. For example, your combined annual contribution to all of your IRAs in 2010--Roth and traditional--cannot exceed $5,000 ($6,000 if you're age 50 or older).

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Can I contribute to a Roth IRA? Answer: Maybe. It depends on your particular circumstances. You must have earned income during the year (typically, wages or self-employment income). Beyond that, your eligibility for a Roth IRA will hinge on two primary considerations: your adjusted gross income for the year and your income tax filing status. In a given tax year, it's possible you may qualify to contribute the maximum amount allowed by law, a lesser amount, or nothing at all.

The maximum contribution is $5,000 in 2009 and 2010. In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 a year in 2009 and 2010.

If your filing status is:

Your ability to contribute to a Roth IRA is limited if your modified adjusted gross income is:

You cannot make a contribution to a Roth IRA if your modified adjusted gross income is:

Single or head of household

At least $105,000 but less than $120,000

$120,000 or more

Married filing jointly or qualifying widow(er)

At least $167,000 but less than $177,000

$177,000 or more

Married filing separately

More than $0 but less than $10,000 $10,000 or more

Your allowable Roth IRA contribution for a given year may be reduced by contributions made to other IRAs during the same tax year. For example, even if you qualify to contribute the full $5,000 to a Roth IRA in 2010, you will be able to put in only $500 if you've already contributed $4,500 to your traditional IRA for that same year.

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It's January, and I forgot to contribute to my IRA. Is it too late?

Answer: No. Generally speaking, the IRS allows you to make your IRA contribution for a particular tax year up until April 15 of the following year. This rule applies to both traditional IRAs and Roth IRAs, giving you some flexibility in terms of the timing of your annual IRA contribution. In 2009 and 2010, you can contribute a total of $5,000 a year to all the IRAs you own. In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 a year in 2009 and 2010.

Note that you can make your annual IRA contribution in a series of payments rather than in one lump sum. For example, let's say you want to invest the maximum amount in your IRA for 2010. You can either make a lump-sum contribution of $5,000, or you can set up a savings plan whereby you invest a fixed amount each month in your IRA. Because you're allowed to spread your 2010 IRA contribution over a 15½-month period (January 1, 2010, through April 15, 2011), you can invest as little as $322.58 per month and still end up contributing the full $5,000.

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Should I contribute to my 401(k) plan at work?

Answer: Yes. Unless you absolutely cannot afford to set aside any dollars whatsoever, you should contribute to your employer's 401(k) plan. A 401(k) plan is one of the most powerful tools you can use to save for your retirement.

The first benefit is that your contributions to a 401(k) plan are not taxed as current income. They come right off the top of your salary before taxes are withheld. This reduces your taxable income, allowing you to pay less in taxes each year. You'll eventually pay taxes on amounts contributed when you withdraw money from the plan, but you may be in a lower tax bracket by then. You may even qualify for a partial tax credit for amounts contributed.

Furthermore, money held in a 401(k) plan grows tax deferred. The investment earnings on plan assets are not taxed as long as they remain inside the plan. Only when you withdraw those earnings will you pay taxes on them (again, possibly at a lower rate). In the meantime, tax-deferred growth gives you the opportunity to build a substantial 401(k) balance over the long term, depending on investment performance.

If you're lucky, your employer will match your contributions up to a certain level (e.g., 50 cents on the dollar up to 6 percent of your salary). You typically become vested in your employer's contributions and related earnings through years of service (the details depend on the plan). Employer contributions are also pretax and are basically free money (once you're vested), so you should try to take full advantage of them. If you fail to make contributions and receive no match, you are actually walking away from money your employer is offering to you.

Another beneficial feature that many 401(k) plans offer is the ability to borrow against your vested balance at a reasonable interest rate. You can use a plan loan to pay off high-interest debts or meet other large expenses, like the purchase of a car. You typically won't be taxed or penalized on amounts you borrow as long as the loan is repaid within five years. Immediate repayment may be required, however, if you leave your employer. Loan payments are deducted from your paycheck with after-tax dollars.

Finally, 401(k)s are a very convenient and reliable way to save. You decide what percentage of your salary to contribute, up to allowable limits. Your contributions are deducted automatically from your salary each pay period.

Because the money never passes through your hands, there's no temptation to spend it or skip a contribution here and there. Most plans allow for contributions as small as 1 percent of your paycheck.

Note: Your employer may also allow you to make after-tax "Roth" contributions to your 401(k) plan. Because your Roth contributions are after tax, those contributions are always tax free when paid out to you. But the main attraction of Roth 401(k) contributions is that the earnings on your contributions are also tax free if your distribution is "qualified." In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 401(k) contribution, and you are either 59½ or disabled when you receive the payment.

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How can I plan for retirement if my employer doesn't offer retirement benefits?

Question: How can I plan for retirement if my employer doesn't offer retirement benefits?

Answer: In many cases, your first step should be to open an IRA and contribute as much as allowable each year. Because of the potential for tax-deferred, compounded earnings, IRAs offer similar long-term growth opportunities as employer-sponsored plans. In addition, you may qualify for tax-deductible contributions or tax-free withdrawals, depending on whether you invest in a regular IRA or a Roth IRA. Another tax-advantaged option to consider is annuities. Generally purchased from a life insurance company, a typical annuity features the potential for tax-deferred growth and provides either fixed or variable payments beginning at some future time (usually retirement). Depending on the type of annuity, you may have several options in how you ultimately take distributions.

Finally, don't forget about traditional investments (e.g., stocks, bonds, mutual funds). Most of these vehicles are taxable, but they can still help you over the long term. The specific types of investments you select will depend on your risk tolerance, time horizons, liquidity needs, and goals for retirement. A financial professional can help you construct a portfolio that makes sense for you.

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I think it's time to start planning for retirement. Where do I begin?

Question: I think it's time to start planning for retirement. Where do I begin?

Answer: Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. With thousands of investment possibilities, complex rules governing retirement plans, and so on, most people don't even know where to begin. Here are some suggestions to help you get started.

First, set lifestyle goals for your retirement. At what age do you see yourself retiring, and what would you like to do during retirement? If you hope to retire at age 50 and travel extensively, you'll require more planning than other people. You'll also need to account for basic living expenses, from food to utilities to transportation. Most of these expenses don't disappear when you retire. And don't forget that you may still be paying off your mortgage or funding a child's education well into retirement. Finally, be realistic about how many years of retirement you'll have to fund. With people living longer, your retirement could span 30 years or more. The longer your retirement, the more money you'll need.

Next, project your annual retirement income and see if that income will be enough to meet your expenses.

Identify the sources of income you'll have during retirement, and the yearly amount you can expect to receive from each source. Common sources of retirement income include Social Security benefits, pension payments, distributions from retirement plans (e.g., IRAs and 401(k)s), and dividends and interest from investments. If you find that your retirement income will probably meet or exceed your retirement expenses, you're in good shape. If not, you need to take steps to bridge the gap. Consider delaying retirement, saving more money, or taking more investment risk.

This is just a starting point. The further you are from retirement, the harder it is to project your future income and expenses. If you're ready for more detailed planning, consult a financial professional.

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What does the term "qualified plan" mean?

Question: What does the term "qualified plan" mean?

Answer: A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under Section 401(a) of the Internal Revenue Code.

There are many different types of qualified plans, but they all fall into two categories. A defined benefit plan (e.g., a traditional pension plan) is generally funded solely by employer contributions and provides you with a specified level of retirement benefits. A defined contribution plan (e.g., a profit-sharing or 401(k) plan) is funded by employer and/or employee contributions. The benefits you receive from the plan depend on investment performance.

The annual contribution limits and other rules vary among specific types of plans. However, most qualified plans share certain key features, including: • Pretax contributions: Employer contributions to a qualified plan are generally able to be made on a pretax basis. That is, you don't pay income tax on amounts contributed by your employer until you withdraw money from the plan. Your contributions to a 401(k) plan may also be made on a pretax basis.

• Tax-deferred growth: Investment earnings (e.g., dividends and interest) on all contributions are tax deferred. Again, you don't pay income tax on those earnings until you withdraw money from the plan.

• Vesting: If the plan provides for employer contributions, those amounts (and related investment earnings) must vest before you're entitled to them. Check with your employer to find out when this happens.

• Creditor protection: In most cases, your creditors cannot reach your qualified retirement plan funds to satisfy your debts.

If you have access to a qualified retirement plan, strongly consider taking advantage of it. Over time, these plans can provide you with substantial retirement savings.

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Can I roll a retirement plan distribution into an IRA? Answer: If you're asking this question, you probably have a 401(k) or other retirement plan through a former employer.

The short answer is yes--most retirement plans allow you to roll your plan funds over into an IRA after you've left your employer's service. However, there is more than one way to do a rollover, and how you do it can be critical.

In most cases, your best strategy is to do a direct rollover. This is a direct transfer of funds from your employer-sponsored plan to your IRA. The administrator of your employer-sponsored plan may send the check right to the trustee of the IRA you have selected. That way, the money never passes through your hands.

Alternatively, the plan administrator may give the check to you to deliver to the IRA trustee. This also qualifies as a direct rollover as long as the check isn't made payable to you. Instead, it should be made payable to the IRA trustee for your benefit. A direct rollover will avoid tax consequences and penalties.

You can also do an indirect rollover, but it's rarely a good idea. Here, the check is made payable to you. When you receive the check, you cash it and deposit the funds in the new IRA within 60 days. The big drawback: Before releasing your plan funds to you, the plan administrator is required to withhold 20 percent of the taxable amount for federal income tax. To make sure you deposit the correct amount, you must replace this 20 percent out of your own pocket. However, if you properly follow all the IRS rules for rollovers, you will avoid tax consequences and can get back the amount withheld for taxes when you file your annual income tax return.

You can roll your distribution into either a traditional IRA or Roth IRA. If you roll the funds over into a Roth IRA (often called a "conversion") you'll include the taxable portion of the distribution in your taxable income in the year you roll the funds over. Note: A special rule applies to 2010 conversions only--you can elect to report all of the resulting income on your 2010 federal income tax return, or you can instead report half on your 2011 return, and half on your 2012 return.

Finally, you may not be allowed to roll over certain types of retirement plan distributions into an IRA. Consult a tax professional for details.

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How much money should I save for retirement?

Question: How much money should I save for retirement?

Answer: Generally speaking, as much as possible. You need to build a fund that you'll be able to draw on for much of your retirement income. Believe it or not, this is fairly easy to do if you start early and make smart choices. Contribute as much as you can to tax-advantaged savings vehicles (e.g., 401(k)s, IRAs, annuities). Then round out your retirement portfolio with other investments (e.g., stocks, bonds, mutual funds). As you're planning and saving, keep in mind that you may have 30 or more years of retirement to fund. So, you probably need an even bigger nest egg than you think.

Your particular circumstances will determine how much money you should save for retirement. Maybe you have a pension plan, or your Social Security benefits will be large enough to tide you over. If so, you may not need to save as much as other people. But other personal factors will enter the picture, too. If you plan to retire early (e.g., age 50 or 55), you'll have even more retirement years to fund and will need larger assets than someone who plans to work until age 65 or 70. Conversely, you may require fewer assets if you plan on working part-time during retirement.

Your projected expenses during retirement will also help determine how much money you'll need and how much you need to save to get there. Certain costs (e.g., food, utilities, insurance) will be shared by almost all retirees.

But you may still be saddled with retirement expenses that many retirees no longer have (e.g., mortgage payments or a child's tuition). Expenses will also depend on the type of retirement lifestyle you want. How many nights a week will you dine out? How much traveling will you do? These kinds of questions will give you a better idea of how much money you'll be spending once you retire. In general, the greater your anticipated retirement expenses, the more you need to save each year to meet those expenses.

Consider hiring a financial professional to help you determine how much you should be saving for retirement.

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Should I invest in a Roth IRA or a traditional IRA? Answer: There is no easy answer to this question. Traditional IRAs and Roth IRAs share certain general characteristics.

Both feature tax-deferred growth of earnings and allow you to contribute up to $5,000 (in 2009 and 2010) of earned income, plus an additional $1,000 "catch-up" contribution if you're 50 or older. Both allow certain low- and middle-income taxpayers to claim a partial tax credit for amounts contributed. But important differences exist between these two types of IRAs. In fact, the Roth IRA is in some ways the opposite of the traditional IRA. A traditional IRA allows anyone with earned income who is under age 70½ to contribute the maximum $5,000 in 2009 and 2010, plus catch-up if eligible. However, your ability to deduct traditional IRA contributions will depend on your annual income, your filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. Any distribution from a traditional IRA will be subject to income taxes to the extent that the distribution represents earnings and deductible contributions. You may also be hit with a 10 percent early withdrawal penalty if you draw money out before age 59½ (there are exceptions to this rule). Beginning at age 70½, you must begin to take annual distributions from a traditional IRA. (Note: the Worker, Retiree and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.)

With a Roth IRA, no age limitation applies to contributions. As long as you have taxable compensation and qualify, you can contribute to a Roth IRA even after age 70½. However, your ability to contribute and the amount you'll be able to contribute (up to the annual limit) will depend on your income and tax filing status. Although Roth IRA contributions are not tax deductible, Roth IRAs have other advantages. You're not required to take distributions from a Roth IRA at any age, which gives you more estate planning options. Another key strength: Qualified withdrawals will avoid both income tax and the early withdrawal penalty if certain conditions are met.

Nonqualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, since the principal is your own after-tax money.

Your personal goals and circumstances will determine which type of IRA is right for you. If you wish to minimize taxes during retirement or preserve assets for your heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you're still working.

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How should I structure my retirement portfolio?

Question: How should I structure my retirement portfolio?

Answer: Your first step is to take advantage of tax-favored retirement savings tools. If you have access to a 401(k) or other employer-sponsored plan at work, participate and take full advantage of the opportunity. Open an IRA account and contribute as much as you can. Ideally, you'd be able to invest in both an employer plan and an IRA. Contributions to most employer plans are made on a pretax basis, while IRAs may allow for either tax-deductible contributions or tax-free withdrawals, depending on the type of IRA you choose. Plus, funds held in an employer plan or IRA grow tax deferred. These tax features may enable you to accumulate a sizable retirement fund, depending on how well the underlying investments perform.

With that in mind, you should aim for long-term investment returns and steady growth. Many financial professionals suggest a balanced portfolio of stocks, bonds, mutual funds, and cash equivalents. The percentage of each will depend on your risk tolerance, your age, your liquidity needs, and other factors. However, the notion is fading that you should change your investment allocations and convert your entire portfolio to fixed income securities, such as bonds or CDs, by the time you retire. Instead, many professionals now advise that you continue investing for long-term growth even after you retire--especially since people are retiring younger and living longer on average. Your own personal circumstances will dictate the right mix of investments for you, and a qualified financial professional can help you make the right choices.

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What are my options if I inherit an IRA or benefit from an employer-sponsored plan?

Question: What are my options if I inherit an IRA or benefit from an employer-sponsored plan?

Answer: If you don't want the money, you can always disclaim (refuse to accept) the inherited IRA or plan funds. But if you're like most people, you will want the money. Your first thought may be to take a lump-sum distribution, but that's usually not the best idea. Although a lump sum provides you with cash to meet expenses or invest elsewhere, it can also result in a huge income tax bill (in most cases, due all in one year). A lump-sum distribution also removes the funds from a tax-deferred environment. Fortunately, you probably have other alternatives.

If you are the designated beneficiary (i.e., you are named as beneficiary in the IRA or plan documents), you can take post-death distributions over your remaining life expectancy, spreading out distributions over a number of years. This life expectancy calculation will give you the minimum amount you must withdraw from the IRA or plan each year (you can always withdraw more than required in any year). Yearly distributions from the IRA or plan must begin by December 31 of the year following the year of the owner's or participant's death. If there are other designated beneficiaries and separate accounts have not been set up, the oldest beneficiary must be used for the life expectancy calculation.

You may have other options as well. If the IRA owner or plan participant died before he or she began taking required minimum distributions, you can generally elect to distribute the entire interest in the IRA or plan within five years of the owner's or participant's death. (In this case, you don't have to begin taking distributions the year after death.) If the IRA owner or plan participant died after beginning to take required minimum distributions, you may be able to spread distributions over the owner's or participant's remaining life expectancy (calculated in the year of death) if that period is longer than your own life expectancy. Be careful, though. An employer-sponsored retirement plan can specify the distribution method that beneficiaries must use. If your choices are limited by a plan, however, you may have the ability to transfer the plan funds to an IRA established in the deceased IRA owner's or plan participant's name--the rules that apply to inherited IRAs would apply to the transferred funds.

You may also have additional options if you are a surviving spouse and a designated beneficiary of the IRA or plan. You can roll over inherited traditional IRA or plan funds into your own traditional IRA or retirement plan. If you're the sole beneficiary you can also leave the funds in an inherited traditional IRA and treat it as your own traditional IRA. In either case you can then name beneficiaries of your choice and defer taking distributions until the required age (usually 70½). Certain restrictions apply, however. For example, you cannot roll over required minimum distribution amounts (i.e., distributions required in the year of death). Consult a tax advisor for more information.

Finally, Roth IRAs are subject to different rules. If you inherit a Roth IRA, you can take distributions over a five-year period (following the Roth IRA owner's death) or over your remaining life expectancy. If you are a surviving spouse beneficiary, you may be able roll the assets over to your own Roth IRA or, if you're the sole beneficiary, treat the Roth IRA as your own. This is significant because, as a Roth IRA owner, you do not have to take any distributions from the Roth IRA during your life. Distributions from an inherited Roth IRA are usually free from income tax if made at least five years after the first contribution to the Roth IRA.

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Can I still have a traditional IRA if I contribute to my 401(k) plan at work?

Answer: Yes. Anyone with earned income who is under age 70½ can open and contribute to a traditional IRA. The contribution limit is $5,000 for 2009 and 2010, plus an additional "catch-up" contribution of $1,000 in 2009 and 2010 if you're 50 or older. However, you may not be able to deduct your IRA contributions if you're covered by a 401(k) plan at work. Whether or not you can deduct your IRA contributions depends on your filing status and annual income (adjusted gross income, or AGI). Specifically, for tax year 2010: If your filing status is:

Your IRA deduction is reduced if your AGI is between:

Your deduction is eliminated if your AGI is:

Single or head of household

$56,000-$66,000

$66,000 or more

Married filing jointly or qualifying widow(er)

$89,000-$109,000

$109,000 or more

Married filing separately

$0-$10,000

$10,000 or more

You may also qualify for a partial tax credit for amounts contributed to your traditional IRA or your 401(k) plan.

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What is vesting?

Question: What is vesting?

Answer: Vesting occurs when you acquire ownership. Does your employer offer a retirement savings plan such as a 401(k), traditional pension, or profit-sharing plan? Did you receive a stock option grant as a year-end bonus?

These employee benefits and others like them are often tied to a timeline known as a vesting schedule. The vesting schedule determines when you acquire full ownership of the benefit.

For example, your employer grants you 10,000 stock options as a thank-you for a job well done, but it may not be time to go mansion shopping just yet. The options may not actually be yours until you're vested. If the options are subject to a vesting schedule, you don't actually own the right to exercise your options until some time in the future. Some stock option plans allow for immediate vesting, while others may delay vesting. Consider these three alternatives for a four-year vesting schedule: • 25 percent each year • 50 percent in years two and four • 100 percent in year four In addition, there are two commonly followed vesting schedules for employer-matching contributions to a 401(k) or other plan: • Cliff vesting: This provides no vested benefit until the third year. After three years of employment, you reach the "edge of the cliff," or vest 100 percent.

• Graded vesting: This provides no vested benefit until year two. For each additional year that you remain with your employer, your benefits vest 20 percent each year. Under this schedule, you'll be 100 percent vested if you remain with your employer for six years.

Keep in mind that if your employer follows the 100 percent in year-three vesting schedule, you'll need to stay with your employer for three years before you are vested. Of course, any personal contributions that you make to your employer's savings plan are automatically fully vested and remain yours no matter how long you stay with the employer.

To find out about your employer's vesting schedule, check with your manager or human resources representative, or read your summary plan description.

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My company has a profit-sharing plan. How do these plans work?

Answer: A profit-sharing plan is a defined contribution plan in which your employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee).

Your employer's contributions to your account, and any investment earnings, accumulate on a tax-deferred basis--the IRS will tax these benefits as part of your regular income only when you begin receiving distributions from the plan, typically after you retire or terminate employment. Whether you can make withdrawals while you are still employed depends on the terms of your plan. For example, some plans permit withdrawals after you've attained at 59½, or after you've been a participant for some specified period of time (usually at least five years), or in the event of a financial hardship. (As an alternative to a taxable withdrawal, you may be able to borrow up to 50 percent of your vested account balance if your employer permits plan loans.)

Be aware that if you take distributions before age 59½, they are subject to a 10 percent penalty tax unless an exception applies. The penalty tax does not apply to distributions you receive after you terminate employment, if your separation occurs during or after the year you reach age 55. The penalty tax also does not apply in the case of distributions made due to a qualifying disability, distributions that qualify as substantially equal periodic payments, amounts you roll over to an IRA or another employer plan, distributions up to the amount of unreimbursed medical expenses, distributions made under a qualified domestic relations order (QDRO), or distributions after your death.

Each plan has a trustee who is generally responsible for managing the plan assets and for preparing various financial and tax documents. Other administrative duties are overseen by a plan administrator, who will frequently hire a third-party administrator to perform most administrative functions. Most plans contain a vesting schedule, often between three and six years, during which time an employee becomes fully vested in the plan. If you were to leave the company prior to full vesting and move your account elsewhere, you would forfeit all or a portion of the account's accumulated value. Profit-sharing plans are usually funded using mutual funds, variable annuities, or life insurance. In certain cases, you may have the authority to direct the investment of the assets in your profit-sharing account. The summary plan description, available to each eligible participant, spells out the details of your plan.

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I teach at a school that offers a 403(b) plan. Is this plan a good way to save for retirement?

Answer: In general, yes. Also known as a tax-sheltered annuity, a 403(b) plan is an employer-sponsored plan designed for employees of certain tax-exempt organizations (e.g., hospitals, churches, charities, and public schools) to invest for their retirement. Typically, the employer purchases annuity contracts or sets up custodial accounts for eligible employees who choose to participate. A 403(b) plan is technically not a qualified plan, but it is said to mimic a qualified plan because it shares some of the same features.

Like a 401(k) plan, a 403(b) plan enables you to make contributions to the plan on a pretax basis. These are known as salary-reduction contributions because they come from your salary before taxes are withheld, thus reducing your taxable income. For tax year 2010, you are allowed to defer up to $16,500 a year or 100 percent of your compensation, whichever is less, to the plan. In addition, if you're 50 or older, you can make an extra "catch-up" contribution of $5,500 in 2010. Employers will sometimes contribute to the plan as well, although employer contributions are not required and (if made) must vest before you are entitled to them. Earnings (e.g., dividends and interest) on your 403(b) plan investments accrue tax deferred. Only when you withdraw your funds from the plan do you pay income tax on contributions and earnings. If you wait until after you're retired to begin withdrawing, you'll probably be taxed at a lower rate.

The combination of pretax contributions and tax-deferred growth creates the opportunity to build an impressive retirement fund with a 403(b) plan, depending on investment performance. You may even qualify for a partial tax credit for amounts contributed if your income is below a certain level. In addition, a 403(b) plan may allow you (under certain conditions) to withdraw money from the plan while still working for your employer. Beware of these "in-service" withdrawals, however. They may be subject to both regular income tax and (if you're under age 59½) a 10 percent early withdrawal penalty. A plan loan, if permitted, might be a better way to obtain the cash you need.

Although some 403(b) plans have a limited number of investment choices, many of these plans have been offering a broader range of investments in recent years, including many well-known mutual funds.

Note: Your employer may also allow you to make after-tax "Roth" contributions to your 403(b) plan. Because your Roth contributions are after tax, those contributions are always tax free when distributed to you. But the main attraction of Roth 403(b) contributions is that the earnings on your contributions are also tax free if your distribution is "qualified." In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 403(b) contribution, and you are either 59½ or disabled when you receive the payment.

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Does the federal government insure pension benefits?

Answer: The federal government insures certain pension benefits. Specifically, it insures defined benefit plans (but not other types of retirement plans) through the Pension Benefit Guaranty Corporation (PBGC), a federal agency created by ERISA. A defined benefit plan is a qualified employer pension plan that promises to pay a specific monthly benefit at retirement. Although the PBGC insures most defined benefit plans, it doesn't insure defined contribution plans.

Defined contribution plan participants have individual accounts, and these plans don't promise to pay a specific dollar amount to participants. Examples of defined contribution plans include 401(k) plans and profit-sharing plans.

To find out if your defined benefit plan is insured by the PBGC, ask your employer or plan administrator. In general, though, your defined benefit plan will be covered unless it meets an exception. Plans not covered include those belonging to professional service corporations (e.g., doctors and lawyers) with fewer than 26 employees, church groups, and state and local governments.

If your employer's pension plan is to be terminated, you'll receive notification from your plan administrator and/or the PBGC. If the PBGC takes over the pension plan because your employer doesn't have enough money to pay benefits owed, the PBGC will review the plan's records and estimate what benefits each person will receive.

The PBGC guarantees that you'll receive basic pension benefits up to a certain annual amount. This amount may be lower than what you would normally have received from your plan. For plans ending in 2010, the maximum annual amount is $54,000 (or $4,500 per month) for a worker who retires at age 65. (If you begin receiving payments before age 65 or if your pension includes benefits for a survivor or other beneficiary, the maximum amount is lower.)

Types of benefits guaranteed include the following: • Pension benefits at normal retirement age • Most early retirement benefits • Disability benefits for disabilities that occurred before the plan was terminated • Certain benefits for survivors of plan participants For more information, see the Pension Benefit Guaranty Corporation's website at www.pbgc.gov.

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What are catch-up contributions?

Answer: If you are 50 or older, or you will reach age 50 by the end of the year, you may be able to make contributions to your IRA or employer-sponsored retirement plan above the normal contribution limit. Catch-up contributions are designed to help you make up any retirement savings shortfall by bumping up the amount you can save in the years leading up to retirement. Catch-up contributions can be made to traditional and Roth IRAs, as well as to 401(k) plans and certain other employer-sponsored retirement plans. But if you participate in an employer-sponsored retirement plan, check plan rules--not all plans allow catch-up contributions.

How much can you contribute as a catch-up contribution? It depends on the type of retirement plan you have and the tax year for which you are making the contribution.

Contribution for tax years 2009 and 2010: 401(k), 403(b), governmental 457(b) plans:* • $16,500 regular annual contribution limit and $5,500 catch-up contribution limit SIMPLE plans: • $11,500 regular annual contribution limit and $2,500 catch-up contribution limit Traditional and Roth IRAs: • $5,000 regular annual contribution limit and $1,000 catch-up contribution limit *403(b) and 457(b) plans also have special catch-up rules that may apply.

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