Retirement Accounts
Retirement can be the best time of your life, but it takes research, planning, and involvement. There are many options and variables involved that can be confusing. Your age, your goals, your objectives, your risk tolerance…they all make a difference. Your career, your income, your lifestyle too. There are multiple paths you can take, which should ultimately lead you to a secure future. Below are listed the most common retirement plans and a brief summary of each. This can help you choose the plan that is right for you. Please see an Investment Professional to help you navigate your path.
IRA (Individual Retirement Account)
IRAs were created to encourage people to save for retirement in addition to any other retirement plans. You can make an annual contribution of up to $5,000 or 100% of your earned income per year, whichever is less. Contributions are fully deductible, regardless of income amount, provided you are ineligible to participate in any other qualified plan. Contributions are partially deductible if your adjusted gross income (AGI) falls within established income guidelines. Any earnings you receive are accumulated tax deferred. Ordinary income tax applies upon withdrawal and a 10% early withdrawal penalty will be administered if withdrawal before age 59 ½. Catch-up contributions may be made annually for those over age 50. Click here to try our Roth IRA conversion calculator.
Roth IRA (Individual Retirement Plan)
Roth IRAs were set up to encourage more people to save for retirement. It allows after-tax contributions of up to $5,000 per individual, per year. Earnings from Roth IRAs are not taxed as they accrue nor when distributed from an account, provided you are at least 59 ½ and your account has been open at least five years upon withdrawal. There are no required withdrawals, but a 10% penalty does apply for withdrawal before age 59 ½. Click here to try our Roth IRA conversion calculator.
SEP (Simplified Employee Pension)
Simplified Employee Pension plans (SEPs) are pension plans designed for self-employed individuals and small businesses. SEPs allow employer to make sizable contribution to employee that is tax deductible to employer and is also excludable from employee’s gross income. Contributions can vary or skip in any year. Ordinary income tax applies upon withdrawal and a 10% early withdrawal penalty will be administered if withdrawal is before age 59 ½.
SIMPLE (Savings Incentive Match Plan for Employers)
A retirement plan that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to the SIMPLE. The employer makes either matching or non-elective contributions to each eligible employee's SIMPLE IRA and employees may make salary deferral contributions. The employer has two alternatives when it comes to making contributions. Contributions to SIMPLE IRAs are immediately 100% vested, and the IRA owner directs the investments.
401(k)
A 401(k) plan is a salary reduction plan that is offered by employers. It offers tax deferred benefits for your retirement investments. You contribute a percentage of your pretax income each pay period to your 401(k) and choose specific investments from among those that are offered for the plan. Any earnings you receive from the 401(k) plan are accumulated tax deferred. Ordinary income tax applies upon withdrawal and a 10% early withdrawal penalty if withdrawal is before age 59 ½.
Individual 401(k)
The Individual 401(k) plan is designed for self-employed individuals and owner-only business. Such plans offer higher contribution limits than other plans and flexibility on the contribution dates. Penalty-free loans from the plan’s funding are available, provided the loan is paid back on time. Contributions are tax deductible and any earnings you receive from Individual 401(k) are tax deferred. Ordinary income tax applies upon withdrawal and a 10% early withdrawal penalty will be administer if withdrawal before age 59 ½.
Profit Sharing Plan
A plan that gives employees a share in the profits of the company. Each employee receives a percentage of those profits based on the company’s earnings. A great way to give employees a sense of ownership in the company. The company decides what portion of the profit is to be shared. There are restrictions as to when and how an employee can withdraw these funds without penalties. Best suited for businesses with fluctuating profits and employee turnover. Contribution limit the lesser of 100% or compensation or $40,000.
Money Purchase Plan
A Money Purchase Pension Plan allows a company to make annual contributions that are not tied to profits. In many ways it operates like a profit sharing plan except the company is required to contribute the same percentage of employees' salaries each year. For added flexibility, offering both a profit sharing and money purchase plan gives a company the ability to boost contributions when they want. Employer contributions are mandatory, and are limited to 25% of total compensation, up to $40,000.
Coverdell IRA - Coverdell Education Savings Account (ESA)
Formerly known as the Education IRA, a Coverdell account can be opened by an immediate family member for a minor to help pay for qualified education expenses: Tuition, fees, academic tutoring, special needs services, books, supplies, room and board, uniforms, transportation, and supplementary items or services required or provided by such school, purchase of computer technology or equipment, if used in school. Contribution limit per year per beneficiary is $2,000. Distributions are Tax-free if used for an eligible educational institution as under section 481 of the Higher Education Act of 1965. Amounts not used for education are subject to taxes and a premature distribution penalty (10%). Contribution limits for these and other plans vary, depending on adjusted gross income, marital status, and other variables. Limits subject to change annually. (Information provided above as of 2009 limits)
Mandatory Distributions
You must begin taking distributions from a Regular IRA by April 15th of the following year after you reach the age of 70 ½. After that you must take your distributions by the end of each calendar year (Dec. 31st). Distributions are based on the value of your account and life expectancy. You can take the required amount from each of your IRA accounts, or you can take the required amount out of just one account, provided the overall distribution amount is correct. If you do not take your required distribution the IRS will impose penalties – which can be substantial. However you can always take more than the minimum required. (suspended for 2009)
No matter what your age, you should know that retirement doesn’t just happen. You have to plan it. You have to save for it. You have to know your path. Alamo Capital can help you find and stay on your path.