Roth IRAs http://www.wisebread.com/taxonomy/term/8345/all en-US 4 Ways Your IRA Beats Your Savings Account http://www.wisebread.com/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="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/piggy-bank-1206604-small.jpg" 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="http://www.wisebread.com/3-reasons-not-to-save-for-your-childs-college-fund">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="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">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="https://fafsa.ed.gov/fotw1314/help/fotw43e.htm">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="http://www.petersons.com/college-search/financial-aid-impacted-situation.aspx">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="http://www.getrichslowly.org/blog/2011/04/20/rebalancing-your-investment-portfolio/">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="http://www.nytimes.com/2009/04/02/business/retirementspecial/02CREDIT.html?_r=2&amp;">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="http://online.wsj.com/article/SB124181801239401917.html">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="http://www.latimes.com/la-ira-story3,0,6977190.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="http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals">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="http://business.time.com/2013/01/23/cash-leaking-out-of-401k-plans-at-alarming-rate/">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="http://www.wisebread.com/7-delayed-spending-tricks-that-help-pay-off-debt">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> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/4-ways-your-ira-beats-your-savings-account">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-roth-iras-are-ideal-for-young-professionals">Why Roth IRAs Are Ideal for Young Professionals</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Did Your Parents Give You a Whole Life Insurance Policy? Here&#039;s What to Do With It.</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-dumb-401k-mistakes-smart-people-make">5 Dumb 401(k) Mistakes Smart People Make</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/help-i-bought-a-stock-dud-what-now">Help, I Bought a Stock Dud! — What Now?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Taxes 401(k) plans IRAs retirement accounts Roth IRAs saving Fri, 26 Apr 2013 10:24:35 +0000 Julie Rains 973546 at http://www.wisebread.com Choosing a Retirement Account: What's Available, and What’s Best for You? http://www.wisebread.com/choosing-a-retirement-account-whats-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="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/6669056165_6b372449b9_z.jpg" 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="http://cashmoneylife.com/roth-ira-withdrawal-rules/" target="_blank">Roth IRA withdrawals</a> and <a href="http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231061" 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="http://www.wisebread.com/6-ways-to-avoid-running-out-of-money-in-retirement">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="http://retireplan.about.com/lw/Business-Finance/Personal-finance/What-Are-Vesting-Schedules-.htm" 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="http://www.irs.gov/Retirement-Plans/401(k)-Plans" 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="http://retireplan.about.com/lw/Business-Finance/Personal-finance/Retirement-Plan-Custodians.htm" 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="http://www.irs.gov/Retirement-Plans/Plan-Participant,-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="http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans" 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="https://www.tsp.gov/index.shtml" target="_blank">Thrift Savings Plan</a> is offered to federal government employees and members of uniformed services. Qualifying employees may receive <a href="https://www.tsp.gov/planparticipation/benefits/benefitsSummary.shtml" target="_blank">matching contributions</a> from their agencies.<br /> &nbsp;</li> <li>The <a href="http://www.irs.gov/publications/p571/ch01.html" target="_blank">403(b) Plan</a> may be available to employees of public schools, certain non-profit organizations, and others. However, <a href="http://www.403bwise.com/faqs/" target="_blank">investment options may consist of annuities</a> in addition to mutual funds.<br /> &nbsp;</li> <li>The <a href="http://www.retirementplans.irs.gov/choose-a-plan/401k-and-profit-sharing-plans/safe-harbor-401k/" 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="http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans" 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="http://www.irs.gov/Retirement-Plans/Designated-Roth-Accounts" 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="http://www.smartmoney.com/retirement/planning/understanding-the-roth-401k-17679/" 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="http://www.irs.gov/Retirement-Plans/Plan-Participant,-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="http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work" target="_blank">covered</a> and <a href="http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work" 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="http://online.wsj.com/article/SB118947843631423511.html" 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="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond" 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="http://www.irs.gov/Retirement-Plans/Plan-Participant,-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="http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:--Payroll-Deduction-IRA" 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="http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SEP" 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="http://www.irs.gov/Retirement-Plans/Plan-Sponsor/SIMPLE-IRA-Plan" 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="http://www.irs.gov/Retirement-Plans/Plan-Participant,-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="http://www.wisebread.com/step-by-step-guide-to-rolling-over-your-old-401k" target="_blank">Step-by-Step Guide to Rolling Over Your Old 401(k)</a>)<br /> &nbsp;</li> <li>The <a href="http://www.irs.gov/Retirement-Plans/Roth-IRAs" 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="http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013" 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="http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-Defined-Benefit-Plan" 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="http://www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html" 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="http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-Money-Purchase-Plan" 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="http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-Profit-Sharing-Plan" 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="http://www.esopassociation.org/explore/how-esops-work" 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="http://www.brightscope.com/">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="http://www.wisebread.com/how-to-make-money-while-traveling-the-world" 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> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-start-saving-for-retirement-at-40">How to Start Saving for Retirement at 40+</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-enjoy-retirement-if-you-havent-saved-enough">How to Enjoy Retirement If You Haven&#039;t Saved Enough</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/retirement-planning-if-you-re-under-30">Retirement Planning If You’re Under 30</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-ways-to-keep-your-retirement-funds-from-disappearing">7 Ways to Keep Your Retirement Funds From Disappearing</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-to-boost-your-401k-returns">4 Ways to Boost Your 401(k) Returns</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) IRAs retirement accounts retirement planning Roth IRAs Fri, 15 Feb 2013 10:48:56 +0000 Julie Rains 967563 at http://www.wisebread.com Why Roth IRAs Are Ideal for Young Professionals http://www.wisebread.com/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="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/young professionals.jpg" 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="http://www.wisebread.com/retirement-accounts-and-money-to-spend" 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="http://www.rothira.com/learn/rules.php">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> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/debbie-dragon">Debbie Dragon</a> of <a href="http://www.wisebread.com/why-roth-iras-are-ideal-for-young-professionals">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-your-ira-beats-your-savings-account">4 Ways Your IRA Beats Your Savings Account</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth">How to Set Up an IRA to Build Wealth</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-boost-your-odds-of-retiring-early">5 Ways to Boost Your Odds of Retiring Early</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-ways-to-avoid-running-out-of-money-in-retirement">6 Ways to Avoid Running Out of Money in Retirement</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Career Building Investment Retirement retirement accounts Roth IRAs young professionals Fri, 07 May 2010 12:00:04 +0000 Debbie Dragon 46145 at http://www.wisebread.com Clever Tax Move for the Un- and Under-Employed http://www.wisebread.com/clever-tax-move-for-the-un-and-under-employed <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/clever-tax-move-for-the-un-and-under-employed" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/hamilton-john-quincy.jpg" alt="Dollar Coins on $10 Bill" title="Dollar Coins on $10 Bill" class="imagecache imagecache-250w" width="250" height="108" /></a> </div> </div> </div> <p>There are a lot of people who used to have a good-paying job but who have been unemployed or underemployed for more than a year. If you're one of those people, here's a clever tax move that can permanently cut your future tax burden.</p> <p>If you used to have a good-paying job, you probably have some tax-deferred savings in an IRA or 401(k). You'll have to pay taxes on that money whenever you take it out.</p> <p>So, here's the clever part: If you're unemployed or underemployed this year, your income is probably very low. If your income is <strong>low enough that you'll owe little or no income tax</strong>, seize this opportunity to shift a few thousand dollars from your IRA to your Roth IRA. The money will be taxed, but the tax will be near zero. And once the money is in your Roth, it'll be able to grow tax-free, potentially for decades, and then still be tax-free when you withdraw it. You'll have already paid the tax on it, only the tax will have been zero.</p> <p>Of course, this tax move only works for a narrow slice of people, those who both:</p> <ol> <li>Have money in an IRA</li> <li>Have a very low taxable income for this year</li> </ol> <p>But for that narrow group, the amount of tax savings could be substantial.</p> <p>Note that it's too late to do this for last year. It is not, however, too early to start planning for this year. In particular, <a href="http://www.wisebread.com/left-a-job-do-a-rollover">if your money is still in your former employer's 401(k), do a rollover</a> to an IRA now, so that you'll be able to transfer the money to a Roth IRA before the end of the year.</p> <p>How much should you move? That's kind of tricky. Ideally, you want to move as much as you can without having to pay any extra tax. But that's not so easy to calculate &mdash; it's about as much work as doing your taxes (and don't forget to consider state as well as federal). But, if you can steel yourself to crank through the numbers, the potential exists to <strong>permanently avoid ever having to pay</strong> the taxes that were only deferred when you put the money into an IRA or 401(k).</p> <p>Especially for people forced into premature retirement, whose incomes are low now but will be higher once their pensions and social security kick in, this can be a great move.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/clever-tax-move-for-the-un-and-under-employed">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-choose-a-roth-401k-or-a-regular-401k">Should You Choose a Roth 401k or a Regular 401k?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-ways-to-max-out-your-ira-contributions-by-april-15th">7 Ways to Max Out Your IRA Contributions by April 15th</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k">4 Reasons Why a Roth IRA May be Better Than Your 401(k)</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/is-this-the-end-of-the-back-door-roth-ira-tax-loophole">Is This the End of the Back-Door Roth IRA Tax Loophole?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/left-a-job-do-a-rollover">Left a job? Do a rollover.</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Taxes 401k IRA Roth IRAs tax avoidance Fri, 26 Mar 2010 14:00:12 +0000 Philip Brewer 6061 at http://www.wisebread.com Contributing to a Roth Versus Paying Down Debt http://www.wisebread.com/contributing-to-a-roth-versus-paying-down-debt <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/contributing-to-a-roth-versus-paying-down-debt" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/forest-steps_0.jpg" alt="Forest Steps" title="Forest Steps" class="imagecache imagecache-250w" width="250" height="263" /></a> </div> </div> </div> <p>This post was prompted by a reader question, but it's an issue that many people face &mdash; we see versions of it all the time in the forums. So, I thought I'd walk through what I think is the best way to approach any problem of this sort. It starts with comparing interest rates, but it ends with a comparison to lottery tickets.</p> <p>The general solution to this kind of problem is to compare rates of return: Is the interest that you have to pay on your debts higher than the return that you can expect get on your investments? If it is (and it usually is), then pay down the debt.</p> <p>In fact it's even stronger than that, because there's the asymmetry between the interest that you <strong>have to</strong> pay versus the return you're only <strong>expecting</strong> to receive. It wasn't long ago that lots of people were expecting to receive 12% (or more) on their stock market investments.</p> <p>Based on that, here's my starting place on where your money ought to go, after you've covered your household expenses and the minimum payment on any debts:</p> <ol> <li>fund 401(k) enough to capture any corporate match</li> <li>accelerated payments on debts</li> <li>max out your Roth</li> <li>further fund 401(k) to the corporate (or IRS) limit</li> <li>regular old (after-tax) investing</li> </ol> <p>(Sometimes it makes sense to skip step 4 and go straight to step 5. I talk about that in my post <a href="http://www.wisebread.com/when-not-to-put-money-in-your-401-k ">When NOT to put money in your 401(k)</a>.)</p> <p>The reader's question, though, has to do with partially skipping step 2 (accelerated payments on debt) in order to get to step 3. Here's what she asked:</p> <p>&nbsp;</p> <blockquote><p>Thanks to a recent promotion, my salary jumped to $100k. The one downside is that I may only be able to contribute to my Roth for 2009 and maybe 2010 (it's my understanding that the income limits to convert will be eliminated in 2010, but the limits to contribute will remain, and start at $105k for single filers). I'm aggressively paying down student loans and will finish by November, but since 2009 may be the last year I can contribute to a Roth, I'm thinking of stopping the extra loan payments for 3 months in order to contribute the $5k max to my Roth for 2009. I contribute 9% to my company 401k and receive an employer contribution of around 7%, my mortgage is my only other debt, and I'm late 20s. My overall retirement savings is lower than I'd like (the loans have been my priority), and I planned to max out contributions once the loans are gone.</p></blockquote> <p>&nbsp;</p> <p>My answer is: Yes, it makes perfect sense to fund the Roth under these circumstances, even though it means that the student loan will take a bit longer to pay off. In fact, it might well make sense even without the special circumstance of having only this narrow window within which to contribute to a Roth.</p> <p>Usually it makes more sense to just get the debt paid off, which is why step 2 comes first. That's because the interest owed on debt is usually higher than you can reliably earn on your investments. But the Roth is a special case because of the tax advantages and the very long time-scale. Money invested in a Roth by a 20-something has the opportunity to grow tax-free for decades &mdash; and then you never have to pay taxes on the earnings.</p> <p>With those advantages, your gain in the Roth is very likely to match the extra interest you end up paying. On top of that, there's a real chance that, over a few decades, it'll do much better yet. To my mind, that tips the scales: Your cost is low and predictable (the extra interest) and your gain can be reasonably expected to match it &mdash; with a substantial chance of an outsized win.</p> <p>Here's another way to look at it. Investing instead of paying down debt is kind of like buying a lottery ticket. You pay $1 and can expect to win (on average) something like 50 cents &mdash; but with a small chance that you'll win thousands of dollars. Because of the unique advantages of a Roth, in this case it'd be like buying a ticket for $1 and expecting that your average return will be very close to $1 (the expected return on your Roth will be close to what you're paying on your student loan) &mdash; but you still keep the chance that you'll win thousands of dollars, because of the future decades during which your Roth has the opportunity to rack up tax-free gains.</p> <p>I think it makes good sense.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/contributing-to-a-roth-versus-paying-down-debt">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/when-to-use-savings-to-pay-off-debt">When to Use Savings to Pay Off Debt</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/snowballs-or-avalanches-which-debt-reduction-strategy-is-best-for-you">Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/debt-repayment-is-not-an-expense">Debt repayment is not an expense</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-choose-a-financial-planner-yes-you">How To Choose A Financial Planner - Yes You!</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/self-sufficiency-self-reliance-and-freedom">Self-sufficiency, self-reliance, and freedom</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Debt Management debt debt reduction investment return Roth IRA Roth IRAs student loan debt taxes Thu, 07 Jan 2010 14:00:28 +0000 Philip Brewer 4503 at http://www.wisebread.com