Transcript Document

Solid Finances Sponsors
• MSU Extension
•
This program is made possible by a grant from the FINRA Investor Education
Foundation through a partnership with United Way Worldwide.
IRAs, 457s & 403b Plans
Joel Schumacher
Sponsored by:
MSU Extension
Schedule
• Estate Planning
– Think you know who gets your property when you die?
Think Again.
• March 8th
– Power of Attorney, Trusts and More
• March 22th
– Wills, Living Wills, End of Life Registry, Advance Directives
& POLST
• April 5rd
– Estate Planning Tools & Tips
• April 19th
Question A: IRA represents Individual
Retirement Account
• True
• False
IRA
• IRS Terminology:
Individual Retirement Arrangement
• Everybody Else’s Terminology:
Individual Retirement Account
Two Types of IRAs
• Traditional IRAs
– Deductible:
• Contributions are deductible on your taxes in the year in which
they are made.
– Non-Deductible:
• Contributions are not deductible or are only partially deductible in
the year in which they are made.
• Roth IRAs
– Contributions are not tax deductible.
– Withdrawals are tax free.
Question B: Do you currently have a
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Traditional IRA
Roth IRA
Roth & Traditional
Neither
How much can I save?
• 2011 & 2012 Contribution Limit
– $5,000
• 2011 & 2012 Catch-up Limit
– Must be age 50 or over
– $1,000
Contribution to an IRA
• Contributions can be made during the year
or until due date for income tax returns for
that year
– Eligible dates for 2011 IRA contributions
are:
• January 1, 2011 to April 17, 2012
Who is eligible?
Requirements:
• You must have taxable income
• You cannot be age 70 ½ or older
– Age limit does not apply to Roth IRAs
• You must meet income limits
Traditional IRAs
• Income Limits (Adjusted Gross Income)
– Single:
• Full Deduction:
$58,000 or less
• Partial Deduction: $58,000 to $68,000
• No Deduction:
$68,000 or more
– Married Filing Jointly:
• Full Deduction:
$92,000 or less
• Partial Deduction: $92,000 to $112,000
• No Deduction:
$112,000 or more
Traditional IRAs
• Exception to these rules if you are not covered
by a retirement plan at work.
• Special Rules for Spouses
– A spouse with no income can contribute in some
cases. A joint tax return must be filed.
Traditional IRA
How it works:
1. Make a contribution
2. Report your contributions on your income taxes
– The contribution is deducted from your taxable income
– This lowers the federal and state taxes you owe
3. Account grows tax free
4. Withdrawals are taxed as regular income
Question C: Do the partial or no deduction
rules apply to your situation?
• Yes
• No
• Maybe
Roth IRAs
• 2012 Income Limits (Adjusted Gross Income)
– Single:
• Full Contribution Limit:
• Partial Contribution Limit:
• Not Eligible:
$110,000 or less
$110,000 to $125,000
$125,000 or more
– Married Filing Jointly:
• Full Contribution Limit:
• Partial Contribution Limit:
• Not Eligible:
$173,000 or less
$173,000 to $183,000
$183,000 or more
Roth IRAs
How it works:
1. Make a contribution
2. Your taxable income remains the same
3. Your account grows tax free
4. Distributions are tax free
Withdrawing IRA Funds
• When can I withdraw my money?
– Anytime
• However, Non-Qualified withdrawals are
assessed a 10% penalty
• Withdrawals from a traditional IRA are
included in income
Withdrawing Money
A 10% penalty is imposed unless the individual meets one of these:
– Age 59 ½ or older
– Disabled
– Deceased
– First Time Home Purchase ($10,000 maximum)
– Higher education expenses
– Qualified Medical Expenses (over 7.5% of gross income)
– Qualified Health Insurance Premiums (while unemployed)
– Distributions are received in the form of an annuity
Extra Rule for Roth’s
• 5-Year Test
– Withdrawal must be 5 or more years after the first
contribution was made.
• Example:
– Janice opens a Roth IRA at age 58 in 2012.
– She retires at age 61 in 2015.
– She will have to pay a 10% penalty if she
withdrawals funds before 2017.
Question D: When do you have to start taking
Required Minimum Distributions?
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Age 65
Age 67
Age 70 ½
Age 75
When you claim Social Security Benefits
Required Minimum Distributions (RMDs)
• Only applies to traditional IRAs
• Must be taken for the calendar year in which you
reach age 70 ½ and each year after that
• Calculating RMDs:
– January 1st balance divided by a factor from an IRS Table.
The factor gets smaller as you get older.
– Your IRA Custodian will likely calculate this for you.
Which is best for me?
• Tax Rates
– Current and During Retirement
• Eligibility
– Higher earners may not be eligible for traditional
• Diversification
– The bulk of most people retirement savings is
“pre-tax”; a Roth is “post-tax”
Question E: Do you expect to have lower
income during retirement?
• Yes
• No
• Not Sure
Question F: Do you expect to pay a higher
marginal income tax rate during
retirement?
• Yes
• No
• Maybe
Converting to a Roth IRA
• You can convert a Traditional IRA to a Roth IRA
• Why? You changed your mind on which is
better for you.
• You can convert some or all of your Roth.
Converting to a Roth IRA
1. Contact your current IRA custodian.
2. Tell them how much you want to convert.
3. They will transfer the funds to a Roth
account for you.
4. You need to report the conversion as regular
income.
• No early withdrawal penalties apply
• You will need to pay taxes on the conversion amount
Roth IRA Conversion Example
– Jim Earns $30,000 in 2012
– Converts $3,000 from his traditional IRA to a Roth
– Jim’s taxable income is increased to $33,000
• This increases Jim’s taxes by $657
Jim’s Federal Income Tax Rate: 15%
15%x $3,000 = $450
Jim’s State Income Tax Rate 6.9%
6.9% x $3,000 = $207
Rollover IRAs
• IRAs can be funded by transferring funds from:
1. Your account in a former employer’s retirement
plan
2. From another IRA
• No tax implications if done correctly
IRA Questions
For More Information:
IRS Publication 590
Employer Plans
• Most employer plans allow an employee to
select their contribution level
– For example: 5% of compensation; 10% of
compensation; or $250 per month
• IRS has maximum employee contributions
– 2012 Limit:
$17,000
• Catch-Up Contributions are allowed
– 2012 Limit: $5,500
– Must be Age 50 or older
MUS Retirement Plans
• Your job “classification” and your hire date
determine your MUS retirement plan.
• MUS Standard Retirement Plans
– Public Employees Retirement System (PERS)
– TIAA-CREF
– Teachers Retirement System (TRS)
– Federal Employees Retirement System (FERS)
– Civil Service Retirement System (CSRS)
MUS Supplemental Retirement Plans
Section 403b Plans
• ING
• MetLife
• TIAA-CREF
• Valic-American General
Section 457 Plan
• Great-West Retirement Services
Question G: University System Employees:
Do you participate in a Supplemental Plan
Retirement Plan?
• Yes
• No
• Not currently, but I have in the past
Contributions
• Contributions are Tax Deductible
– Withdrawals are taxable
• Annual Maximum Limits for 403(b) Plans
– $17,000 per year
– $5,500 per year “catch-up” if you are age 50 or older
• Limit applies to all supplemental 403(b) plans
Contributions
• % of salary or fixed amount each month
– Example: 2% of pay or $75 each month
• Must fill out a new form each year
• Amount can be changed during the year
457 Plan
• $17,000 annual maximum deferral amount
• $5,500 additional catch-up contributions are
allowed for those over 50
• Special rules for those within 3 years of the
plan’s normal retirement age. These rules
may allow for additional deferrals of up to
$17,000 annually for 3 years.
Questions
www.msuextension.org/solidfinances/