Retirement planning is
The process of determining retirement income goals and the actions and decisions necessary to address those goals.
Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets.
Future cash flows are estimated to determine if the retirement income goal will be achieved.
What you need to know
An IRA is an account set up at a financial institution that allows an individual to save for retirement with federal tax-free growth or on a tax-deferred basis. The three main types of IRAs each have different advantages:
- Traditional IRA - You make contributions with money you may be able to deduct on your tax return in the contribution year, and any earnings can potentially grow tax-deferred until you withdraw them in retirement with current income tax due at withdrawal.
Many retirees also find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
- Roth IRA - You make contributions with money you’ve already paid income taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
- Rollover IRA - A Traditional IRA intended for money "rolled over" from a qualified retirement plan. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
Whether you choose a Traditional or Roth IRA, the tax benefits allow your savings to potentially grow, or compound, more quickly than in a taxable account.
Why invest in an IRA?
Many financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. An employer-sponsored savings plan, such as a 401(k), might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401(k) and an IRA:
- Supplement your current savings in your employer-sponsored retirement plan.
- Gain access to a potentially wider range of investment choices than your employer-sponsored plan.
- Take advantage of potential tax-deferred or tax-free growth.
1. A Traditional IRA
is the term for a regular IRA available to those under age 70 1/2 who have earned income (i.e., job compensation).
Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70 1/2.
If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible.
A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution of up to $2,000 annually to an IRA despite the other spouse's coverage
under an employer-provided retirement plan. When the couple's AGI reaches $150,000, deductibility for such contributions begins to decline, and
it reaches zero at a joint AGI of $160,000. Withdrawals prior to age 59 may result in a 10% IRS penalty tax in addition to current income tax.
2. A Roth IRA is an IRA in which:
- Contributions to the account are not deductible.
- "Qualified" distributions (i.e., withdrawals) from the account are not taxable. Limitations and restrictions may apply.
- Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a "qualified" distribution.
A "qualified" distribution from a Roth IRA is a withdrawal that meets one or more of the following:
- Made after the taxpayer attains age 59 1/2
- Made to a beneficiary after the taxpayer's death
- Made because the taxpayer is disabled
- Made by a first-time homebuyer to acquire a principal residence
No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-tax-year period beginning with the tax-year in which the taxpayer first contributed to a Roth IRA.
3. An Employer and Employee Association Trust Account, or group IRA, is a traditional IRA set up by employers, unions, and other employee associations for employees or members.
Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Rosth IRA's. Their tax treatment may change.
4. A Simplified Employee Pension (SEP-IRA) is a traditional IRA set up by an employer for a firm's employees. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA.
5. A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a traditional IRA set up by a small employer for a firm's employees. In 2001, an employee may contribute up to $6,500 per year to these IRAs. This contribution limit will increase each year through 2005, when it will reach $10,000. In 2006 and later years, the allowable contribution will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed. The employer sponsoring the SIMPLE will also make a matching contribution based on a percentage of the employee's pay
6. A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than $2,000 in annual compensation. The couple must file a joint tax return in the year of the contribution. The working spouse may contribute up to $2,000 per year to the Spousal IRA and up to $2,000 per year to his or her own IRA. A couple, then, may contribute up to $4,000 per year provided neither IRA receives more than $2,000.
7. A Rollover (Conduit) IRA is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for subsequent transfer into a qualified retirement plan available through a new employer. To retain this eligibility through Dec. 31, 2001, the IRA must be composed solely of the original distribution and earnings (i.e., no other contributions or rollovers may be added to or mingled with the IRA), and the new employer's plan must allow the rollover. After Jan. 1, 2002, commingling of conduit IRA money with other IRA or qualified retirement plan money is permitted, and the mixing of such monies will have no impact on the ability to transfer those IRAs to a new employer's retirement plan.
8. An Inherited IRA is either a traditional or a Roth IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rules apply to an inherited IRA. A tax deduction is not allowed for contributions to this IRA, a rollover to or from another IRA owned by the heir is not permitted, and the proceeds must be distributed and taxed within a specific period as established by the Internal Revenue Code
9. An Education IRA (EIRA) is an IRA established to provide funds that will allow a beneficiary to attend a program of higher education. There is no tax deduction allowed for the contribution, but all deposits and earnings may be withdrawn free of tax and penalties if used to pay for the costs of higher education. Beginning in 2002, EIRA proceeds may also be used free of tax and penalty to pay for the qualified expenses of a kindergarten through 12th grade education in public, private, and/or religious schools. EIRA contributions are limited to a maximum of $500 per year, but that's in addition to the $2K limit on any other IRA.
Stratos Wealth Partners and LPL Financial do not provide tax advice or services. Please consult your tax advisor regarding your specific situation.