retirement accounts en-US 4 Ways Your IRA Beats Your Savings Account <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-ways-your-ira-beats-your-savings-account" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="piggy banks" title="piggy banks" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>You may wonder why you should save money inside a retirement account.</p> <p>The simple answer is that retirement assets are treated differently than regular assets. The federal government, many institutions, and probably even <em>you</em> tend to consider the money set aside to sustain yourself in your old age as sacrosanct. And there are real benefits to having this perception. (See also:&nbsp;<a target="_blank" href="">3 Reasons Not to Save for Your Child's College Fund</a>)</p> <p>Here are four big reasons to stash funds in a <a target="_blank" href="">retirement account of your choice</a> instead of a regular savings or investment account.</p> <h3>Retirement Assets Are Not Included in Calculations for College Aid</h3> <p>Even if you have hundreds of thousands of dollars combined in your 401(k) and IRA, your child could qualify for federal aid based on <a target="_blank" href="">Free Application for Federal Student Aid (FAFSA) calculations</a>. However, if this same amount of money is held in a regular account, then the likelihood of getting aid is greatly diminished.</p> <p>Federal aid calculations are based on a variety of factors. Colleges and universities may have their own formulas, but these typically mirror federal guidelines. <a target="_blank" href="">The Expected Family Contribution (EFC) considers regular assets but not retirement plans</a>. Sure, a base level of assets is protected and a relatively small percentage is considered available to pay college expenses, but substantial holdings can increase this number to the point that your EFC easily exceeds the Cost of Attendance (COA).</p> <p>Such a scenario may <em>seem</em> unlikely. If you have $500,000 or more saved or invested outside of retirement, then you might think that you would have&nbsp;a high income, a&nbsp;fully funded educational accounts; and&nbsp;a well-stocked retirement portfolio.</p> <p>But you could have easily been a steady saver and accumulated significant wealth without the benefit of a high income, or you could have a high income for much of your working life but experience a career setback when your child enters college. So, putting money in an official retirement fund now can help your family qualify for federal aid in the future.</p> <h3>Tax Benefits Are Available With Retirement Accounts</h3> <p>Whether you have a traditional or Roth IRA account, you enjoy several tax benefits over a regular savings or investment account:</p> <ul> <li>Reduction in the present-year tax liability for contributions made to a traditional IRA or 401(k) plan</li> <li>Exemption of income taxes for qualified distributions from Roth accounts</li> <li>Freedom from taxes on capital gains, interest, dividends, and other earnings while funds are held within the retirement account</li> </ul> <p>Note that you&rsquo;ll pay taxes on distributions from traditional accounts (that is, taxes are deferred until retirement rather than eliminated). However, no taxes on earnings are owed on Roth accounts prior to and during retirement.</p> <p>Embedded in the benefit associated with deferring or avoiding capital gains taxes is the bonus of being able to <a target="_blank" href="">diversify and rebalance your portfolio without tax consequences</a>.</p> <p>For example, if you have a large amount of your employer&rsquo;s stock in your 401(k) plan or a concentrated position of one company in your IRA, you can sell these holdings to fund the purchase of index fund shares (or other investments that would diversify your portfolio) without having to pay capital gains tax. All of the proceeds can be plowed back into your retirement fund. However, if you sold a similar amount in a regular account, you would lose a percentage of your earnings to taxes (unless you qualified for 0% capital gains tax) and have less to reinvest.</p> <h3>Retirement Accounts Enjoy More Protection</h3> <p>Retirement funds are safer than non-retirement assets if you ever have to declare bankruptcy or shield yourself from a creditor&rsquo;s claims.</p> <p>Hopefully, you will never have to face these situations. But if such problems arise, money held in most employer-sponsored plans <a target="_blank" href=";">is protected from creditors in bankruptcy </a>under federal law (with notable exceptions of the IRS and former spouses). Money in an IRA is also exempted to an extent (up to $1 million plus cost-of-living adjustments).</p> <p>For non-bankruptcy situations, employer-sponsored plans compliant with the Employee Retirement Income Security Act (ERISA ), such as <a target="_blank" href="">401(k) plans</a>, provide the best protection. IRAs may or may not be sheltered from claims based on state laws.</p> <p>As an added precaution, no matter where your money resides, consider <a target="_blank" href=",0,6977190.story">increasing liability coverage</a> by getting an umbrella policy and boosting coverage associated with homeowners&rsquo; and auto insurance policies. These steps may help you pay claims in the event of a lawsuit without tapping retirement or non-retirement funds.</p> <h3>Retirement Funds Are Off Limits for Regular Expenses</h3> <p>You might think that if you mentally designate certain funds for retirement, then you won&rsquo;t ever spend these dollars except in an extreme emergency.</p> <p>But in the decades between setting aside money in your 20s and 30s and full retirement in your 60s and 70s, there are likely to be many opportunities to spend money earmarked for retirement but held in a regular account. These might include anticipated events such as your children&rsquo;s college education or wedding; unexpected setbacks from medical expenses or long periods of unemployment; or hoped-for opportunities such as a backpacking trip out west, an extended overseas visit, or a bargain-priced vacation house.</p> <p>Even money put in retirement plans isn't entirely safe. Certainly, many people <a target="_blank" href="">withdraw funds</a> for hardships, such as the down payment on a purchase of a home or those medical bills I mentioned earlier. And a recent study indicated that about <a target="_blank" href="">25% of employees are tapping 401(k)s for regular expenses</a>.</p> <p>Generally, though, money placed in a retirement account should stay there because you consider those dollars off limits. Tax penalties associated with taking retirement distributions early are often so high that forgoing opportunities, <a target="_blank" href="">delaying spending</a>, and finding alternative funds are often simpler and preferred solutions.</p> <p>The main point of contributing to a 401(k), IRA, or similar plan is to accumulate assets that generate a stream of passive income, which helps you pay expenses when you are no longer working. You can build wealth in a manner that creates this income without opening an IRA or transferring money from your paycheck to an employer-sponsored retirement plan. But even beyond the basic tax advantages, there are tangible and intrinsic benefits to putting and keeping money in a retirement account instead of a regular one.</p> <p><em>Where is your money? Have you thought about putting more in a retirement account?</em></p> <a href="" class="sharethis-link" title="4 Ways Your IRA Beats Your Savings Account" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Julie Rains</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Investment Taxes 401(k) plans IRAs retirement accounts Roth IRAs saving Fri, 26 Apr 2013 10:24:35 +0000 Julie Rains 973546 at How to Set Up an IRA to Build Wealth <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-set-up-an-ira-to-build-wealth" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>Here's some food for thought &mdash; if you save just under $11 a day in an investment that grows 8% each year, and in 40 years you'll have $1 million.</p> <p>What would you do with a million dollars? Would you travel the world, visiting a new country every month? Support a cause that's dear to your heart?</p> <p>How would you feel? More secure, knowing that you accomplished the goal of being able take care of most of your expenses?</p> <p>To put this in perspective, you'll put in less than $150,000 of your own money, yet you'll end up with over six times that amount. That demonstrates the time value of money and the incredible power of compound interest.</p> <p>And it gets even better. An IRA is a great place to do all your saving, because you'll get some <a href="">nice tax benefits</a> &mdash; benefits that'll put even more money in your pocket.</p> <p>Let's get started. Here's how to set up a wealth building IRA in four simple steps. (See also:&nbsp;<a href="">Choosing a Retirement Account:&nbsp;What's Available, and What's Best for You?</a>)</p> <h2>Step 1: Traditional or Roth?</h2> <p>There are two types of IRAs, and the first step you need to take is to decide which one of the two you want to open &mdash; a Traditional or Roth IRA.</p> <p>What's the difference between the two?</p> <p>With a Traditional IRA, your withdrawals at retirement are taxed, but your yearly contributions are tax deductible. This means that if you contribute $5,500 every year and you're in the 25% tax bracket, you'll also save $1,375 in taxes every year.</p> <p>With a Roth IRA, you contribute with after-tax money, but your withdrawals at retirement are tax free. This means that if you retire with $1 million, you won't have to pay taxes on a single penny of that $1 million.</p> <p>Which one should you choose?</p> <p>If you're <a href="">just starting out in your career</a> and have a relatively low salary, it may make more sense to pay taxes now while you're still in a low tax bracket. In this case, choose the Roth IRA.</p> <p>But if you're making the big bucks and you're at the height of your earnings potential, you'll probably be in a lower tax bracket in retirement. In this case, choose the Traditional IRA.</p> <p>There may be other factors that come into play when deciding between the two, but the guidelines above provide a good starting point. If you want help making a more informed decision, check out the <a target="_blank" href="">IRS's guide to IRAs</a>.</p> <h2>Step 2: Which Company?</h2> <p>Once you decide which type of IRA is best for you, the next step is to decide which company you want to invest with. The main things you want to look for in a company are:</p> <ol type="1" start="1"> <li>The availability of good mutual funds</li> <li>Low fees</li> <li>Low minimum opening requirements</li> </ol> <p>Several reputable companies meet these three criteria. Two of the well-known ones are Vanguard and Fidelity. As such, they're the ones I'll be referring to in more detail below.</p> <h2>Step 3: Which Fund?</h2> <p>After you decide which company you want to invest with, the next step is to choose your investment. There are several ways to invest, and several types of investments to consider.</p> <p>But I'll share with you the two methods that experts in the personal finance community suggest. These methods will save you money and build more wealth.</p> <p><strong>Hands-Free Funds</strong></p> <p>The first method is for those of you who want to stay hands-off, yet still earn a good return on your money. If you don't want to actively monitor your investments, then target date retirement funds are for you. Just pick the fund with the year closest to the time you want to retire, and you're good to go. Set it, and forget it.</p> <ul type="disc"> <li><a target="_blank" href="">Fidelity Freedom Funds</a> have a $2,500 minimum in order to open an account. They come with expense ratios between 0.44% and 0.76%.<br /> &nbsp;</li> <li><a target="_blank" href="">Vanguard Target Retirement Funds</a> have a lower minimum, requiring just $1,000 in order to open an account. They're also cheaper to own, with expense ratios just between 0.16 % and 0.18%.</li> </ul> <p><strong>Hands-on Funds</strong></p> <p>The second method is for those of you who want to be more hands-on and pay less in fees. If you want to reduce your costs of investing, consider building a portfolio that you manage yourself.</p> <ul type="disc"> <li>Most Fidelity index funds have a $2,500 minimum, and expense ratios between 0.10% and 0.34%.<br /> &nbsp;</li> <li>Most Vanguard index funds have a $3,000 minimum, and expense ratios between 0.18% and 0.24%. By buying a few different funds at different dollar amounts, you'll end up paying less in fees.</li> </ul> <p>If you'd like to see an example of how I do it, check out the <a target="_blank" href="">Core Four Portfolio</a>.</p> <h2>Step 4: Contribute Regularly</h2> <p>After you've chosen your investment, the last &mdash; and most important &mdash; step is to contribute to your IRA on a consistent basis.</p> <p>Remember that million dollar example at the beginning of this post? For the time value of money and the <a href="">magic of compounding</a> to work for you, you need to invest regularly. Fortunately, this is simple to do.</p> <p>Just like you can invest in your 401k automatically every two weeks through direct deposit from your paycheck, you can also automatically invest in your IRA in the same way. By setting up automatic transfers from your checking account to your IRA, you'll build wealth with much less effort.</p> <p>Remember, just $11 a day can deliver a million dollars your way.</p> <p><em>When will you set up an IRA and begin building wealth?</em></p> <a href="" class="sharethis-link" title="How to Set Up an IRA to Build Wealth" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Darren Wu</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Investment Retirement IRA retirement accounts Roth IRA Tue, 19 Mar 2013 10:00:42 +0000 Darren Wu 969859 at 6 Ways to Get Paid for Saving Money <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/6-ways-to-get-paid-for-saving-money" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="found money in an unexpected place" title="found money in an unexpected place" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>You can make money by saving money, apart from interest, dividends, and investment earnings. These methods deliver bonuses in ways you may not have recognized as getting paid to save. (See also:&nbsp;<a href="">The 5 Best Online Savings Accounts</a>)</p> <h3>1. Claim the Saver's Credit</h3> <p>This money comes from the federal government via the IRS. Through the <a href="" target="_blank">Retirement Savings Contributions Credit</a> (aka Saver's Credit), you can get up to $1,000 (or $2,000 if married filing jointly) if you contribute to a <a href="" target="_blank">qualified retirement account</a> and meet certain requirements, which most notably include income limits.</p> <p>You can't make more than $28,750 in modified adjusted gross income ($43,125 if head of household or $57,500 if married filing jointly) to be eligible. At those income levels, you may not have a lot of extra cash to sock away for retirement, but if you do save, you'll get a nice bonus. Use <a href="" target="_blank">Form 8880</a> to calculate and claim your credit.</p> <h3>2. Win Prizes and Rewards for Saving Money</h3> <p>You can earn rewards and may be able to win prizes by tracking your savings with a couple of online services.</p> <ul> <li><a href="" target="_blank">SaveUp</a> helps you to monitor savings and debt payoff, and gives you the opportunity to play for prizes that range from a $100 gift card to a $2 million jackpot. The site also dispenses rewards in the form of promotional offers.<br /> &nbsp;</li> <li><a href="" target="_blank">SmartyPig</a> gives you a place to save money for specific purposes such as a summer trip to the beach or new flooring for your house. When you have accumulated the dollars, you can redeem your savings by 1) transferring money to your checking account, 2) loading money to a prepaid debit card, or 3) receiving a gift card from certain retailers. While option #1 doesn't give you extra cash, you'll get 1% more if you take your savings on the debit card and a bonus of up to 11% if you choose a gift card.</li> </ul> <h3>3. Earn Bonuses for Setting Aside Money in Savings Accounts</h3> <p>Many banks and credit unions have cash incentives for customers who commit to saving. For example, BBVA Compass matches a percentage of transfers from a checking account to a savings account; you can earn up to $250 per year through the <a href="" target="_blank">Build My Savings program</a>. Bank of America also contributes up to $250 through its <a href=";statecheck=NC" target="_blank">Keep the Change program</a>.</p> <p>And, I learned via <a href="" target="_blank">Money Crashers</a> that Citizens Bank has a <a href="" target="_blank">CollegeSaver savings account</a> that gives a one-time $1,000 bonus when your child reaches 18 if you make minimum monthly deposits.</p> <h3>4. Get Cash for Opening and Funding an Investment Account</h3> <p><a href="" target="_blank">Brokerage firms</a> offer incentives for opening and funding an investment account. To get rewards, you typically have to make a hefty deposit. For example, to earn $200, you'll need to put $50,000 in a new account with <a href="" target="_blank">Charles Schwab</a> (but you can earn $100 on a deposit of just $10,000 if you are an <a href="" target="_blank">AARP member</a>).</p> <p>However, your bank, credit union, or other financial institution may offer more accessible deals. For example, <a href="" target="_blank">ShareBuilder</a> is offering a $50 bonus to open and fund an IRA with $5,000.</p> <h3>5. Snag Your Company's Match</h3> <p>You can make extra money courtesy of your employer if you contribute to a qualified retirement plan and your employer matches contributions. Review plan documents to verify that a match is available. Set aside the percentage of your pay that harvests the maximum payout from your employer.</p> <h3>6. Take Tax Deductions</h3> <p>The federal government and most state governments give you a bonus (in the form or lower taxes) for your contributions to traditional retirement accounts (such as traditional 401ks or IRAs) and Health Savings Accounts (HSAs).</p> <p>There are restrictions for tax deductions, generally based on earnings and the amount of deductible for the <a href="" target="_blank">high-deductible health plan</a> linked to the HSA. But if you qualify for tax deductions and put money in these accounts, you can lower your tax liability and increase your cash inflow, either from a larger refund or smaller tax payment.</p> <p>Even though interest rates are low and rewards for saving are often small (even in a <a href="" target="_blank">high-yield CD</a>) or uncertain in investment accounts, there are ways to get cash bonuses that boost your bottom line.</p> <p><em>How have you made money by saving money?</em></p> <a href="" class="sharethis-link" title="6 Ways to Get Paid for Saving Money " rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Julie Rains</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Banking Investment Organization college savings plans retirement accounts savings accounts savings rewards Wed, 06 Mar 2013 11:36:33 +0000 Julie Rains 968036 at Choosing a Retirement Account: What's Available, and What’s Best for You? <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/choosing-a-retirement-account-whats-available-and-what-s-best-for-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="A pair of unoccopied green Adirondack chairs on the beach." title="lounge chairs at beach" class="imagecache imagecache-250w" width="250" height="159" /></a> </div> </div> </div> <p>You know you need to save for retirement, no matter how many years away retirement is for you. But understanding your choices and picking the right account may seem daunting.</p> <p>The most popular and talked about retirement accounts are the 401(k) and the Roth IRA. Both of these have well-deserved, mostly positive reputations. Many financial advisors recommend that you participate in your employer's 401(k) plan so you can:</p> <ul> <li>Receive matching contributions from your employer, boosting your retirement savings with no extra effort on your part<br /> &nbsp;</li> <li>Reduce your taxable income by the amount of your plan contributions (also known as &quot;elective deferrals&quot;), which lowers your tax liability<br /> &nbsp;</li> <li>Enroll in automatic payroll deductions to fund your account, making the entire process after the set-up mindless</li> </ul> <p>The Roth IRA is touted for different reasons. By contributing to this account, you can:</p> <ul> <li>Receive tax-free distributions in retirement (you'll pay ordinary income taxes on distributions from traditional accounts)<br /> &nbsp;</li> <li>Access funds with fewer restrictions and tax consequences compared to other retirement plans (see article on <a href="" target="_blank">Roth IRA withdrawals</a> and <a href="" target="_blank">IRS rules</a>)</li> </ul> <p>The downsides to these choices are that you have limited investment options and potentially high fees with the 401(k) plan while you don't get a tax deduction right now with the Roth IRA.</p> <p>But wait, there are even more nuances to consider.</p> <p>For example, your employer may not offer matching contributions or even have a 401(k) plan, or you may earn too much for a Roth IRA. So, you should figure out what types of accounts are available to you, sort through their features, and then pick the one (or ones) that are best for you. Let's get started! (See also:&nbsp;<a href="">6 Ways to&nbsp;Avoid Running Out of Money in&nbsp;Retirement</a>)</p> <h2>Retirement Accounts and Their Features</h2> <p>There are various ways of categorizing the universe of retirement account options. An account may be employer sponsored or independent of your workplace.&nbsp;Contributions may be tax deductible when you fund the account (traditional) or distributions may be tax free in retirement (Roth).&nbsp;Your account may be characterized by defined contributions (such as an IRA with rules about the amount you can put in the account during your working years) or defined benefits (such as a pension plan with a specified payment stream in retirement).</p> <p>Features that you should evaluate before choosing an account include:</p> <ul> <li><strong>Contributions</strong>: Do you contribute to the account, does your employer, or both? Are there income or other eligibility restrictions to participate and make contributions?<br /> &nbsp;</li> <li><strong>Tax Benefits</strong>: What are the tax benefits of the account? Are these benefits restricted based on income or other requirements?<br /> &nbsp;</li> <li><strong>Investment Choices</strong>: Are you responsible for making investment decisions, and what are your investment choices?<br /> &nbsp;</li> <li><strong>Fees</strong>: What are the fees associated with the account?<br /> &nbsp;</li> <li><strong>Ownership and Access</strong>: Do you have full rights to the assets in the account immediately, and, if not, what is the <a href="" target="_blank">vesting schedule</a>? Can you access funds through a participant loan or withdrawal before retirement?</li> </ul> <p>To get the complete story on your account options, you'll need to read documents associated with plans sponsored by your employer, look at the types of accounts and investment selections offered by your financial institution, and consult with a financial and/or tax advisor.</p> <p>But, in general, the following retirement accounts have common characteristics.</p> <p><strong>Traditional 401(k) Plan</strong></p> <p>Many employers offer a traditional <a href="" target="_blank">401(k) plan</a> that allows employees to save money for retirement. Funds are deducted from your paycheck and deposited in a <a href="" target="_blank">retirement account held in your name</a>.</p> <ul> <li><strong>Contributions</strong>: As an employee, you can contribute up to $17,500 per year. Your employer may also make a matching contribution. Combined annual contributions are capped at $51,000 or 100% of the employee's compensation. Catch-up contributions of up to $5,500 for those 50 or older can also be made. (Note that IRS restrictions may change based on cost-of-living adjustments.)<br /> &nbsp;</li> <li><strong>Tax Benefits</strong>: Your contributions reduce your taxable income when you fund the account. Earnings are tax deferred.<br /> &nbsp;</li> <li><strong>Investment Choices</strong>: You choose from a list of investment selections offered by your employer, the plan sponsor. Typically, these choices include mutual funds.<br /> &nbsp;</li> <li><strong>Fees</strong>: Expenses include 1) plan administrative fees; 2) investment fees, which may include sales commissions for mutual funds; and 3) fees incurred on specific transactions, such as borrowing from the account.<br /> &nbsp;</li> <li><strong>Ownership and Access</strong>: You own the funds you contributed to the account, but your employer&rsquo;s contributions may not be 100% available until you are fully vested. Borrowing is generally permitted but loan provisions are dictated by the plan's design. Distributions may be taken prior to retirement if you qualify for a <a href=",-Employee/401(k)-Resource-Guide---Plan-Participants---General-Distribution-Rules">financial hardship</a>.</li> </ul> <p><em>Retirement Accounts Similar to the Traditional 401(k) Plan:</em></p> <ul> <li>The <a href="" target="_blank">457(b) Plan</a> may be offered to employees and independent contractors of state and local governments and non-profit organizations.<br /> &nbsp;</li> <li>The <a href="" target="_blank">Thrift Savings Plan</a> is offered to federal government employees and members of uniformed services. Qualifying employees may receive <a href="" target="_blank">matching contributions</a> from their agencies.<br /> &nbsp;</li> <li>The <a href="" target="_blank">403(b) Plan</a> may be available to employees of public schools, certain non-profit organizations, and others. However, <a href="" target="_blank">investment options may consist of annuities</a> in addition to mutual funds.<br /> &nbsp;</li> <li>The <a href="" target="_blank">Safe Harbor 401(k) Plan</a> is nearly identical to the 401(k) plan from an employee&rsquo;s perspective. However, funds contributed by employers are always fully vested.<br /> &nbsp;</li> <li>The Individual or <a href="" target="_blank">One-Participant 401(k)</a> is available to the self-employed. You can contribute the lesser of 25% of your income or $51,000 annually.<br /> &nbsp;</li> <li><a href="" target="_blank">Roth 401(k)s are designated Roth accounts held inside of a 401(k)</a>. However, contributions are not tax deductible. <a href="" target="_blank">Qualified distributions are excluded from income in retirement</a>.</li> </ul> <p><strong>Traditional IRA</strong></p> <p>An Individual Retirement Arrangement (IRA) gives you a vehicle to save money for retirement in a way that is not tied to an employer or specific job.</p> <ul> <li><strong>Contributions</strong>: All contributions are made by you and <a href=",-Employee/Retirement-Topics-IRA-Contribution-Limits" target="_blank">are limited to $5,500 per year (or $6,500 per year for those who are 50 and older)</a>.<br /> &nbsp;</li> <li><strong>Tax Benefits</strong>: You may be able to take a tax deduction for contributions, and earnings are tax deferred. Deductions are limited or eliminated for higher earners depending on your income, tax filing status, and availability of a retirement plan at work. (See tables to determine eligibility for those <a href="" target="_blank">covered</a> and <a href="" target="_blank">not covered by a retirement plan at work</a>.)<br /> &nbsp;</li> <li><strong>Investment Choices</strong>: You can choose from investment options offered by your bank, brokerage firm, or other financial institution. These might include mutual funds, ETFs, individual stocks, and CDs. <a href="" target="_blank">Real estate can also be held in an IRA</a>.<br /> &nbsp;</li> <li><strong>Fees</strong>: You may incur account opening or maintenance fees, although <a href="" target="_blank">many online brokers have no-fee IRAs</a>. Investment costs may include stock trading fees as well as costs to purchase and redeem mutual funds.<br /> &nbsp;</li> <li><strong>Ownership and Access</strong>: You own the account, and all the money is yours. Participant loans are not permitted. Withdrawals prior to retirement can be made but are subject to a 10% penalty in addition to ordinary taxes associated with the distribution. There are <a href=",-Employee/Retirement-Topics---Tax-on-Early-Distributions" target="_blank">exceptions</a> that allow you to avoid the penalty.</li> </ul> <p><em>Retirement accounts similar to the Traditional IRA:</em></p> <ul> <li>The <a href="" target="_blank">Payroll Deduction IRA</a> is a regular IRA but involves setting up a payroll deduction with your employer to fund the account.<br /> &nbsp;</li> <li>The <a href="" target="_blank">SEP-IRA</a> is available to those who have self-employment income or work for a small business that offers the SEP as its retirement plan. Annual contributions can be made by the business owner only, generally up to $51,000 or 25% of your annual income, whichever is less.<br /> &nbsp;</li> <li>A <a href="" target="_blank">SIMPLE IRA</a> allows both you and your employer to contribute to your IRA. You can contribute up to $12,000 each year plus $2,500 for catch-up contributions for those 50 and older. Employer contributions are typically 3% but may vary by plan.<br /> &nbsp;</li> <li><a href=",-Employee/Retirement-Topics---Rollovers-of-Retirement-Plan-Distributions" target="_blank">Rollover IRAs</a> are accounts that have been created by transferring funds from 401(k) or similar plans to an IRA. (See also: <a href="" target="_blank">Step-by-Step Guide to Rolling Over Your Old 401(k)</a>)<br /> &nbsp;</li> <li>The <a href="" target="_blank">Roth IRA</a> has many of the traditional IRA features. However, contributions are not tax deductible and qualified distributions are not subject to taxation. Also, you may not be able to contribute if your income is too high. (See table to <a href="" target="_blank">determine the amount of Roth IRA contributions you can make</a>.)</li> </ul> <p><strong>Pension Plan</strong></p> <p>A pension plan is a commonly recognized <a href="" target="_blank">defined benefit plan</a>, which specifies the benefit you receive in retirement. Benefits are determined by a formula usually based on years of service and earnings while employed.</p> <ul> <li><strong>Contributions</strong>: The employer typically makes contributions on behalf of employee participants. Contributions from employees may be required or voluntary. Plan administrators make sure that contributions support the benefit that is promised to employees upon their retirement.<br /> &nbsp;</li> <li><strong>Tax Benefits</strong>: There are no special tax benefits for employees.<br /> &nbsp;</li> <li><strong>Investment Choices</strong>: The employer chooses the investments. Investment risk is largely borne by the employer, which must ensure that funds are available to provide employees with a specific amount of money.<br /> &nbsp;</li> <li><strong>Fees</strong>: Expenses are paid by the employer.<br /> &nbsp;</li> <li><strong>Ownership and Access</strong>: Your rights are dictated by the plan's design. Typically, you must work for the sponsoring employer for a certain number of years before becoming fully eligible to receive benefits in retirement. Participant loans may be permitted; in-service withdrawals are not allowed.</li> </ul> <p><em>Retirement Accounts Similar to the Pension Plan:</em></p> <ul> <li>A <a href="" target="_blank">Cash Balance Plan</a> offers a defined benefit. However, this benefit is reported in terms of account balances (rather than a monthly payment) for each employee. Upon retirement, the employee can typically opt for an annuity or a lump-sum payment.</li> </ul> <h2>More Employer-Sponsored Plans</h2> <p>There are many more types of retirement plans that you may encounter during your career.</p> <ul> <li>A <a href="" target="_blank">Money Purchase Plan</a> requires that your employer contribute a set percentage of your annual income each year to the retirement account. This contribution cannot exceed 25% of your income or $51,000. As an employee, you may be able to make non-deductible contributions to the plan. Participant loans are permitted but in-service withdrawals are not allowed.<br /> &nbsp;</li> <li>The <a href="" target="_blank">Profit-Sharing Plan</a> is similar to the Money Purchase Plan but does not have mandated contributions and employees cannot make contributions. The annual contribution amount may vary but must follow a formula so that profits are equitably distributed to all employees. In-service withdrawals are permitted.<br /> &nbsp;</li> <li>The <a href="" target="_blank">Employee Stock Ownership Plan or ESOP</a> allows employers to contribute company stock to a retirement plan on behalf of its employees. Over time, employees become vested in the plan; that is, you take full ownership of the stock given to you.</li> </ul> <h2>Choosing a Retirement Account</h2> <p>Figuring out where to stash your money could start with a review of the retirement accounts offered by your employer. Look at the benefits, if any, offered without your contribution such as a pension plan or ESOP. Research the quality of your 401(k) or 403(b) by looking at plan reports and using online evaluation tools such as <a href="">Bright Scope</a>; note the employer match in particular.</p> <p>Additional factors in your decision may include:</p> <ul> <li>Comfort in choosing investments and managing your own portfolio<br /> &nbsp;</li> <li>Uncertainty about future employment, particularly if you want to change jobs, return to school, <a href="" target="_blank">travel</a>, or stay at home with children<br /> &nbsp;</li> <li>Sources and amounts of annual income</li> </ul> <p>For general guidance, look at your current situation, state of mind, and plans for the future.</p> <p>If you are&hellip;</p> <ul> <li><strong>Really Busy</strong>: Use payroll deduction to participate in your employer's 401(k) or similar plan, particularly if you receive a match. Open an IRA when you have more time.<br /> &nbsp;</li> <li><strong>Controlling</strong>: Sock away money in an IRA so that you can invest at your discretion. A Roth IRA will give you better-than-average control over funds if you need access later, plus allow you to take distributions at your discretion and avoid taxes in retirement. <br /> &nbsp;</li> <li><strong>Eager</strong>: Open, fund, and manage as many accounts as you can, recognizing that contribution limits are combined for various types of 401(k) and similar plans as well as IRAs.<br /> &nbsp;</li> <li><strong>Transient</strong>: If you know that you will be changing jobs soon, invest in an IRA so that you can avoid the hassle of doing a Rollover IRA. Plus, you may have to forgo some or part of the company matches anyway if you leave before becoming fully vested.<br /> &nbsp;</li> <li><strong>Uncertain</strong>: Put enough in the 401(k) or similar plan to get a company match, and designate half of your money to a Roth within the plan if possible. Split your IRA contribution into Traditional and Roth accounts.<br /> &nbsp;</li> <li><strong>Self-Employed</strong>: Start a One-Participant 401(k) plan or SEP-IRA to save self-employment and/or business earnings. </li> <li><strong>High Earning</strong>: Set aside money in a designated Roth account within a 401(k), especially if you are a high earner who would otherwise not qualify for a Roth IRA. You can afford to pay taxes now in order to avoid them later. </li> </ul> <p>The best place to put your retirement dollars may vary from year to year and change as your retirement portfolio and other assets grow. By understanding the features of various retirement accounts, you can decide what works for you.</p> <a href="" class="sharethis-link" title="Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Julie Rains</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Retirement 401(k) IRAs retirement accounts retirement planning Roth IRAs Fri, 15 Feb 2013 10:48:56 +0000 Julie Rains 967563 at Capital Substitutes for Labor — and Vice Versa <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/capital-substitutes-for-labor-and-vice-versa" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Woman working in a factory" title="Woman working in a factory" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Whether you're hoping to retire early or worried that you won't be able to retire at all, this is something you need to understand. (See also: <a href="">Can You Buy Your Way Out of the Rat Race?</a>)</p> <p>Did you know there used to be a return on capital? Sorry, a little joke there. With interest rates down near zero, it's starting to seem like a safe income on capital is an old-fashioned concept. Dividend rates had been low for some time &mdash; meaning that even the risky income was low &mdash; and then the stock market lost 40%, wiping out a couple decades of that low income. All in all, it's been a bad few years for income from capital.</p> <p>It used to be easy. You could talk about the 4% rule, which said if you had a diversified portfolio, you could spend 4% of your capital this year &mdash; and increase that spending with inflation &mdash; and reasonably expect that your portfolio to grow enough to keep up.</p> <h2>Planning Purposes</h2> <p>Even though <a href="">the 4% rule is looking a little iffy</a>, I think the principle remains sound. At some ratio, capital substitutes for income from labor, and vice versa. For planning purposes, I think 4% is as good a ratio as any.</p> <p>If that's the right ratio, you need about $25 of capital to support every $1 of spending that you're not going to earn from your labor (because 4% of $25 is $1).</p> <p>On the one hand, this calculation can be pretty discouraging. If you see retirement age bearing down on you like an express train and your retirement savings has barely reached five figures...well, a $10,000 portfolio can be expected to support annual spending of around $400. Not the sort of dream retirement that most people had in mind when they first started putting money in their 401(k).</p> <p>In fact, the reality is much brighter, because the calculation also works in reverse.</p> <p>Let's say that your financial advisor has told you that, to supplement what you're expecting from social security (and maybe a pension, if you're getting one), you need to have retirement savings of $X. And let's further say that you're coming up short. And not just a little short. Let's finally say that even if you work a few extra years and save as hard as you can, you're going to be short by $100,000.</p> <p>There's going to be a gap, and using the 4% rule, we can estimate just how big that gap will be. In this case, the gap is going to be $4,000 a year.</p> <p>My point here is that filling a $4,000 gap isn't so very hard. One option would be to earn that much money. Another option would be to cut spending by that much. Neither option will be what you'd expected when you made your retirement plan, but neither option is necessarily a great burden. Lots of people choose to work in retirement. Lots of people find that they need to cut back on spending to stretch their retirement savings.</p> <p>Of course, there's every option in between &mdash; for every $100 you can cut spending, that's $100 you don't need to earn in retirement.</p> <h2>Tradeoffs</h2> <p>There's nothing new in these tradeoffs &mdash; you're already making them. Every economic decision you make has its roots in this sort of thinking: Which college to go to (indeed whether to go to college), which jobs to apply for (and which job offers to accept), where to live, what car to buy (or whether to go car-free), how often to eat out, how often to eat rice and beans, what brand of coffee to buy.</p> <p>The key takeaway here is that you can, within rough limits, make long-term plans based on these tradeoffs.</p> <h2>Insight</h2> <p>Without this tool, if your financial advisor (or some retirement planning website) tells you you need to triple your contributions to your 401(k), or else you're not going to be able to retire, you have no idea what that really means.</p> <p>With this tool, you can make a good, albeit inexact calculation. For each $1,000 you don't save, your spending in retirement will have to fall by about $40 a year.</p> <p>It is, of course, entirely up to you how you act on that insight. Maybe looking at an impoverished retirement will inspire a bit of frugality now. Maybe you'll try to work extra hours or find a second job. Maybe you'll look to a new career that pays better &mdash; or a new career with better options for continuing to earn some money in retirement.</p> <p>Do remember that it's just a rough calculation. The return on capital is so low right now, anyone spending 4% of their capital this year is probably spending at unsustainable levels. The 4% rule is a planning tool, not a guarantee &mdash; but it's a very useful planning tool.</p> <p>Knowing how you can swap labor for capital or capital for labor can help you <a href="">design your life</a> to meet your goals.</p> <a href="" class="sharethis-link" title="Capital Substitutes for Labor — and Vice Versa" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Philip Brewer</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Personal Finance capital labor retirement accounts social security Fri, 21 Dec 2012 10:48:38 +0000 Philip Brewer 955721 at Why Roth IRAs Are Ideal for Young Professionals <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-roth-iras-are-ideal-for-young-professionals" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="young professionals" title="young professionals" class="imagecache imagecache-250w" width="221" height="240" /></a> </div> </div> </div> <p>The sooner you start saving for retirement, the more time you have to save for it and the greater the likelihood that you will have a large nest egg. Young professionals (20s and 30s) who make a decision to start saving for retirement can do so in many different types of savings and retirement accounts.</p> <h3>Financial Challenges for Young Professionals</h3> <p>Most young professionals are still becoming established in their career, so their incomes may fluctuate. For those who are single with no children, they are being taxed at the most disadvantaged tax filing status. So theoretically, they pay more in taxes. For others who decide to get married and start a family, they have to deal with expenses such as wedding costs, larger living space, more vehicles, childcare expenses and other expenditures. This is also a time when people begin making payments on college loans.</p> <p>When it comes to saving for retirement, young professionals need a way to <a href="" title="save for retirement">save for retirement</a> that will allow them to have great flexibility and as many tax advantages as possible.</p> <h3>Roth IRA Flexibility</h3> <p>A Roth IRA may be the answer for most young professionals. You can go online and open up a Roth IRA in a matter of minutes. Whenever you choose you can contribute money to it. You can contribute up to $5,000 per year or up to your taxable income for that year, whichever is smaller. Money in a Roth IRA grows tax-free and can be withdrawn tax-free.</p> <h3>Roth IRA Tax Advantages</h3> <p>Unlike most other retirement accounts, if a young professional wanted to withdraw money that they contributed to their account, with <a href="">Roth IRA rules</a>, they can make tax-free withdrawals at anytime. This is huge, because withdrawing money from most other retirement accounts before age 59.5 will leave you with a 10% tax penalty along with being taxed as ordinary income. If the money that was contributed to the Roth IRA has any earnings like interest, dividends or capital gains, this money can be withdrawn after a seasoning period and justification period. The simplest seasoning and justification period is reaching age 59.5, but there are other seasoning and justification periods such as becoming disabled or being a first-time home buyer. So when you go to purchase your first home as your primary residence you can withdraw up to $10,000 of earnings tax-free. All of these tax-benefits are not available in any other retirement vehicle, so the Roth IRA is an ideal retirement account for young professionals.</p> <p>Saving for the future can be a difficult task, especially while you are in your 20s and 30s. Therefore, you need as much flexibility and tax-advantages as possible. A Roth IRA can be the retirement account of choice for most young professionals.</p> <a href="" class="sharethis-link" title="Why Roth IRAs Are Ideal for Young Professionals" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Debbie Dragon</a> and published on <a href="">Wise Bread</a>. Read more <a href="">Retirement articles from Wise Bread</a>.</div></div> Career Building Investment Retirement retirement accounts Roth IRAs young professionals Fri, 07 May 2010 12:00:04 +0000 Debbie Dragon 46145 at Retirement for Stay-at-Home Parents <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/retirement-for-stay-at-home-parents" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Mom and Kids" title="Mom and Kids" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Many families make a sacrifice by having one parent stay at home to raise their children.&nbsp; If the stay-at-home parent remains at home and unemployed for the majority of his or her working years, what happens when the stay-at-home parent reaches retirement age?</p> <p>Without employment, a stay-at-home parent isn't going to have an employer-sponsored retirement plan to help him or her out during the golden years.&nbsp; To qualify to open an IRA, the IRS requires you earn an income, so that's out, too!&nbsp; Even if you're not generating an income, you need to establish retirement savings, but with the limitations on IRAs, what are your options?</p> <p>If you're married, you can open a spousal Individual Retirement Account (IRA).&nbsp; The spousal IRA is designed for nonworking spouses to save for retirement with funds from their spouses' income.&nbsp; The 2008 maximum contribution is $5,000 a year in a spousal IRA (or $6,000 per year if you're 50 or older).&nbsp; You can open a spousal IRA as a <a href="">Roth or Traditional IRA</a>.&nbsp; With a spousal Roth IRA, you could invest $4,000 a year for 20 years and with an average return of 8% per year &ndash; end up with almost $200,000 that you won't owe taxes on.&nbsp; Uncle Sam already got his share from the money you invested &ndash; which is the primary advantage of Roth IRAs over most other types of retirement accounts which do not tax the original investment but tax your withdrawals.&nbsp; The other benefit of a spousal Roth IRA is that you could withdraw your investment any time, without penalty.&nbsp; The earnings of your contributions must remain in the account for a minimum of five years and until you're at least 59 or else you'll pay big in taxes and penalties, but the amount you contribute can be withdrawn and it won't cost you anything.&nbsp; Ideally, you would leave your money in the IRA for as long as possible, but it's always nice to know you have access to your money in case of an emergency.</p> <p>If you're not married, or otherwise don't meet the requirements for a spousal IRA, you could always look at other interest-earning deposit accounts for establishing a retirement fund.&nbsp; There are many high interest <a href="">savings accounts</a>, checking accounts, fixed rate IRAs, certificates of deposit and money market accounts which can be opened for as little as $1 &ndash; and are virtually risk free, meaning you aren't gambling with the money you set aside.&nbsp; The earlier you start and the more consistent you are with saving money, the better off you'll be when you reach your retirement years.&nbsp; <br /> &nbsp;</p> <a href="" class="sharethis-link" title="Retirement for Stay-at-Home Parents" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Debbie Dragon</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Personal Finance Investment IRA retirement accounts savings accounts stay at home parent Tue, 13 Jan 2009 15:23:04 +0000 Debbie Dragon 2733 at