Retirement Plans
Overview 401(k) IRA Keogh Plans Social Security
Whats a 401(k)?
401(k) You can deposit up to $15,000 a year Up to $44,000 can be deposited total Withdrawn directly from paycheck The Employment Retirement Income Security Act (ERISA) requires that all 401(k) deposits be held in custodial accounts in order to keep your money safe in the event that something happens to your employer such as bankruptcy. •
Vesting Vesting means that there is a tiered schedule for when the money employers contribute to your account is actually yours. For example, your employer may have a three-year vesting schedule that increases your ownership of the money by onethird each year. After three years, the money is all yours and the future contributions are 100-percent yours.
Calculator
Change Jobs •
Two options:
•
1) roll over to a new account money must go directly to the account in order to avoid the 10% penalty •
•
2) keep in old employers account must have at least $5,000 in the account and you must be under the plans retirement age •
IRA’s Traditional IRA Contributions are tax deductible Roth IRA Earnings and gains are tax free SEP IRA Self employed business owner Simple IRA Employee and employer make contributions
Traditional IRA Contributions are tax deductible Earnings and gains are taxed when distributed Contribution limit of $5,000 annually if 49 or younger Contribution limit of $6,000 annually if 50 or older Limit is reduced if you make contributions to other retirement plans. Withdrawals prior to age 59 ½ may incur a 10% IRS tax. Tax deductible phase out occurs between $56,000 and $66,000 if single Tax deductible phase out occurs between $89,000 and $109,000 if married and filed jointly
Roth IRA Contributions are not tax deductible Distributions can be tax free (if qualified) Contribution limit of $5,000 annually if 49 or younger Contribution limit of $6,000 annually if 50 or older Tax deductible phase out occurs between $105,000 and $120,000 if single Tax deductible phase out occurs between $167,000 and $177,000 if married and filed jointly Must be designated as a Roth IRA when set up You can continue to make contributions after the age of 70 ½ You can leave amounts in a Roth IRA for as long as you live
SEP IRA For self employed business owners Contributions are tax deductible to the business Distribution can be anywhere between 0% 25% of owners income on W2 up to the limit Withdrawals prior to age 59 ½ may incur a 10% IRS tax http://www.individual401k.com/0win/calculator.htm
Simple IRA Stands for Savings Incentive Match Plan for Employees 100 or fewer employees No other retirement plan Contribution limit of $11,500 annually if 49 or younger Contributions limit of $14,000 annually if 50 or older Employers match employee contributions up to a certain percentage of their income Withdrawals prior to age 59 ½ may incur up to a 25% IRS tax
Keogh Plans Name changed to HR10 Serves as Tax Shelter Contributions tax deductible and taxes deferred on earnings until money is distributed or payments received (then treated as taxable income) Contribute a percentage of earned income (25% limit or $47,000) Early withdrawal penalty (around 10%) Must start receiving distributions by April 1 of the year you turn 70 1/2 , but may still make taxdeferred contributions Must adopt a written plan documentation extensive best to leave paperwork to financial organizations that have access to preapproved “prototype” plans
Keogh Plan Eligibility Eligible Selfemployed, small business owner, or an active partner in unincorporated business who performs personal services for the company A sole proprietor who files Schedule C In a partnership who’s members file Schedule E (the partnership must establish the Keogh Plan) Working for another business, but working for your own business as well (fulltime job, writer on the side royalties from book)
Not Eligible Salaried worker for incorporated business, with no other source of income Retired and not receiving compensation for a business A volunteer at a business that offers the plan
Keogh Plans Defined Benefit (like a traditional pension plan) Guarantees a set annual payment Must calibrate contributions to ensure payments provided Need an actuary to handle calculations In unprofitable years contribution still necessary Defined Contribution (more like a 401(k)) Profitsharing Plan more flexibility to tailor plan contributions to your business ’s profitability. Allows varying contribution amounts each year, inservice withdrawals, and taxdeferred employer contributions. In years when you don’t make a profit, you can’t contribute. Moneypurchase Plan requires contribution when business makes a profit. Fixed contribution rate. To change contribution amount have to amend plan document (complicated process).
If you have employees... Must notify them of plan’s contents in writing If eligible, provide employees with opportunity to participate If employees are not coowners of business, their participation imposes additional restrictions on you: Might not be able to use prototype plan Must follow nondiscrimination rules to ensure savings opportunities are fair and proportionate
Taxing & Retirement Income taxes paid to Social Security and Medicare by every working person in the US
Social Security Based on credit system: Earn 1 credit for each quarteryear worked (max 4 credits per year) 40 credits retirement eligibility (at least 10 years ) Must earn a certain amount of money each quarter to gain credit (increases each year to adjust for inflation) Benefit amount based on earnings made over lifetime Lowerincome workers receive a higher percentage of former wages than higherincome workers Benefits subject to costofliving increases Generally average out to 42% of former wages
Social Security Early retirement age: 62 (20% reduction in benefits received) Full retirement age: see table to left Retirement Calculator
Transfer of Benefits Family members of retired worker who can receive their benefits: Spouse over age 62 Spouse of any age who is caring for a child under age 16 Spouse of any age who is caring for a child who was disabled prior to age 22 Divorced spouse over age 62 if marriage lasted 10 years or more Unmarried children under age 18 or still in high school Children who were disabled before age 22
Working During Retirement Social Security: Could increase benefits received in the future If you are under full retirement age for the entire year, $1 deducted from benefit payments for every $2 earned above annual limit ($14,160 in 2010) In year you reach full retirement age, $1 deducted for every $3 earned above a different limit ($37,680 in 2010) Starting with the month you reach full retirement age, no limit on earnings
References http://www.allbusiness.com/personalfinance/38787811.html http://www.iacpa.org/favicon.ico http://www.agis.com/Document/310/retirementplanningprograms.aspx http://www.ssa.gov/OP_Home/handbook/ssahbk.htm http://www.irs.gov/retirement/article/0,,id=137307,00.html http://ira.com/faq/faq03.htm http://www.moneyzine.com/financialplanning/retirement/IRAcontributionlimits/ http://www.sepira.com/ http://www.irs.gov/retirement/sponsor/article/0,,id=139831,00.html http://www.irs.gov/pub/irspdf/p590.pdf http://money.howstuffworks.com/personalfinance/financialplanning/401k4.htm http://www.mycalculators.com/ca/401kcalcm.html http://www.irs.gov/retirement/article/0,,id=226255,00.html Kapoor, Jack R., Les R. Dlabay, and Robert J. Hughes. Focus on Personal Finance. 3rd. New York: McGrawHill Companies Inc., 2010, pp. 466480.