Transcript Personal Retirement Plans

IRAs
Financial Planning for Women
March 2006
Jean Lown & Tiffany Smith
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Why YOU need an IRA
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Americans are poorly prepared for long
retirements in a changing world
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Life expectancy is rising
Health care costs are escalating rapidly
Long term care costs are formidable
 Medicare is in far more trouble far sooner than SS
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Lower investment returns (J. Clements, WSJ)
Traditional company pensions are
disappearing
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More Reasons for IRA
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DEBT!! (2004 SCF)
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Debt growing faster than wealth
Credit card debt up 27% in past 5 years
18% are leasing vehicles rather than buying–
high mo. payments but no asset to show
Mortgage debt growing faster than home equity
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19% of retirees still owe mortgage (Avg. $31K)
More college grads with high debt
Today’s retirees in much better situation
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J. Clement’s Simple test
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Sum retirement plan values + investments
Add: home equity you plan to free up by
downsizing at retirement
Subtract: all your debts (mortgage, auto…)
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Assume you can withdraw 5%/year
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If you have $300,000, 5% = $15,000/yr
Plus Social Security & any pension
Most Americans need to invest much more!
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Individual Retirement Accounts
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Overview
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What is an IRA?
Why contribute?
Who can contribute?
How much can you contribute?
What are tax advantages?
Where to invest?
What if I need my money before retirement?
Retirement Savings Credit
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What is an IRA?
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Individual investment account (not joint)
For retirement
A tax sheltered way to save
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Why Contribute?
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How much do you need to live on in
retirement?
Will your 401(k), 403(b) be enough?
How could saving a little bit a month
possibly help?
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Power of Monthly Investments
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$50 @ 8% for 15
years = $17,417
$50 @ 8% for 25
years = $47,868
$50 @ 8% for 35
years = $115,459
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$100 @ 8% for 15
years = $34,834
$100 @ 8% for 25
years = $95,737
$100 @ 8% for 35
years = $230,918
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Individual Retirement Accounts
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IRAs allow workers to set up personal
retirement accounts invested in
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Stock and/or bond
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individual securities or mutual funds
CDs (too conservative!)
other types of investments
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Who Can Contribute?
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Any worker with earned income
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No age minimum
Worker’s Spouse
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may contribute to a spousal IRA for nonemployed spouse
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Individual Retirement Accounts
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$4,000/year contribution limit out of
earned income (2006)
$5,000/year limit for workers age 50 and
older
investment earnings are tax-sheltered
until withdrawn
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IRA Contribution Limits
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1st 27 years: $2,000/year
2001 tax law changes
2002-2004: $3,000
2005-2007 $4,000
2008 and after: $5,000*
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Adjusted for inflation in $500 increments
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IRA Contribution Limits age 50+
 2002-2005:
+ $500
 2005: $4,500
 2006 and after: + $1,000
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Two Types of IRAs
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Traditional
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Tax-deductible contributions
Non-deductible contributions
Roth (newer type)
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Contributions not tax-deductible
Withdrawals free of taxes in retirement
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Traditional Deductible IRAs
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Workers not covered by an employer
plan may make tax-deductible
contributions of up to $4,000 ($5,000 for
50 and older) per year
Workers who are covered by an
employer plan may be able to make taxdeductible contributions depending on
income
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Income tax deduction
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= Marginal tax rate (MTR) x contribution
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What is your MTR?
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Highest rate at which your income is taxed
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10%, 15%, 25%, 28%, 35%, 38
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Find out your MTB
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Use tax tables
Amount of taxable income?
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To find MTB add $100 to taxable income
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Amount of tax
Amount of tax?
$ difference in amount of tax = MTB
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2006 Tax Brackets: Single
based on Taxable Income
(after subtracting PE & SD)
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$0 to $7,550
7,551 to 30,650
30,651 to 74,200
74,201 to 154,800
154,801 to 336,550
336,551 and higher
10%
15%
25%
28%
33%
35%
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Non-Deductible, After-Tax IRAs
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Available to workers covered by an employer
plan whose incomes are too high to qualify for a
deductible IRA
Contributions are not tax deductible
Investment earnings are tax-sheltered until
withdrawn.
Rarely used since Roth IRAs introduced
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Roth IRAs
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Contributions are not tax-deductible.
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Investment earnings are tax-sheltered.
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Tax-free and penalty-free withdrawals of
earnings may be made after age 59 ½.
Thus, it is possible to never have to pay taxes on
Roth IRA earnings.
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Roth IRA Income Limits
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BUT cannot contribute to Roth if modified
adjusted gross income (MAGI)>
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$110,000 single filer
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$160,00 joint filer
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What if I need my money early?
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Roth contributions can be withdrawn at
anytime
May not borrow from IRA
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Roth IRA Withdrawals
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Tax-free and penalty-free withdrawals of
earnings are allowed:
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if you become disabled
for buying your first home
or for your children’s (or your own) education
expenses*
As long as the earnings are from funds
invested for at least 5 years
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Where to Invest?
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IRAs allow workers to set up personal
retirement accounts invested in a wide
variety of investments
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Stock/bond mutual funds
other types of investments
Starting from scratch or…
Complementing your employer plan?
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Getting Started
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If no other retirement plan
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Choose a stock mutual fund
Growth potential
 Broad diversification
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Invest for as little as $50/month
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T. Rowe Price mutual funds
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Allow $50 automatic Investment Plan (AIP)
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Automatic monthly transfer from checking to MF
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Complementing Employer Plan
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Review employer options
Determine your asset allocation
What investment categories are missing?
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International investments?
Small cap stocks?
Real estate?
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Distributions from Traditional IRAs
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Penalty-free withdrawals can begin at
age 59 ½.
Taxes are owed on these withdrawals
Withdrawals must begin by age 70 ½.
Generally, withdrawals must be made at
a rate that would exhaust the fund over
your remaining life expectancy.
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Retirement Savings Contribution
Credit
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For low & moderate income taxpayers
For retirement investing
Tax credit of up to $0.50 for each $1.00
up to the first $2,000 you contribute to
your employer's plan or to an IRA
Maximum tax credit is $1,000
Expires after the 2006 tax year
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Retirement Contribution Credit
Married
Couples
Filing Jointly Heads of Households
Single Filers
Percent
of Tax
Credit
$0–$22,500
$0–$15,000
50%
$22,500–$24,375
$15,000–
$16,250
20%
$32,500–
$50,000
$24,375–$37,500
$16,250–
$25,000
10%
Over $50,000
Over $37,500
Over $25,000
0%
$0–$30,000
$30,000–
$32,500
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Choosing a Stock MF for IRA
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May FPW program (2005 & 2006)
Stock Mutual Funds for Your IRA
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Questions on IRAs?
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Upcoming FPW
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April 12: Avoiding Investment Fraud
May 10: The Best Mutual Funds for Your
IRA
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Low cost stock mutual funds for as little as
$50/month
June 12: Social Security, Sandy Hunter,
SSA
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Women & Financial Planning
Research
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Study is being expanded beyond baby
boomer women
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Please fill out a survey
Some survey respondents will be invited to
participate in a focus group ($25
compensation)
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URS Seminars
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For workers within 5 years of retirement
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Personal Financial Planning Seminar
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In Logan Thursday, May 18, 9 am - 4 pm
In Ogden Friday, May 12, 9 am – 4 pm
Register with URS: www.urs.org
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800-753-7750
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