Strategic
Asset Management
Free Information: IRA,401k
[2009 update: For Roth IRA and regular IRA the contribution limit is $5,000 plus a $1,000 catch-up provision if you are over 50]
[2007 update: The total limit of your retirement plan contributions is 15,500 . You can put up to 10,500 into a Simple IRA and $4,000 into an IRA or Roth IRA, more if you are over 50. Contact us for more details]
A great reference is form 590 from the IRS, it gives all the details on IRA's (in english!)
Important: Have a beneficiary designated for your account. This is very important for tax and probate.
In 2010 the income limitation for ROTH IRA's conversions will end.
Over age 70 1/2? It's time to start taking money out of your IRA. Here's a great calculator to determine how much you need. I double checked it with another source and it appears correct. I suggest taking out a little more than required just to be safe.
FINRA also has a simpler RMD calculator here
72t.net has another RMD calculator here, and lots of additional info.
Not sure how much you need to save for retirement? AARP has a very quick retirement calculator you may want to try.
Leaving your current job? Have a 401k? Not sure what to do with it? Contact Strategic Asset Management now. There are several simple but very important steps to ensure your 401k is safely transferred without any taxes or fines from the IRS.
Which is best? 401(k) , Roth IRA, and IRA
With so many retirement plans available and changing tax laws, picking the best method for long-term saving is confusing. This paper will explain the benefits and drawbacks of the three most common choices: 401k, IRA, and Roth IRA. Each choice offers tax-deferred growth. While funds remain in the account you pay no taxes on any interest, long-term gains, or short-term gains. This tax advantage gives one a powerful incentive to sort out the advantages and drawbacks of these retirement plans. There are other retirement plans available to people, included SIMPLE plans, SEP-IRA, & 403(b), but the 401(k), Roth IRA, and IRA are the most common.
Please note — I am not a tax professional. You should consult with your tax advisor before proceeding with any retirement vehicle.
Executive Summary: Don’t give me details, tell me what to do
Here is the order of contributions which will maximize your after tax returns:
401k - Deposit enough to gain all of your employers matching bonus.
Roth IRA - if possible, deposit up to the maximum.
401k - Continue contributions up to the maximum amount possible.
IRA - if you haven’t contributed to a Roth IRA, contribute to a conventional IRA instead
I have received some comments that its better to contribute to a conventional IRA instead of a Roth IRA. The advice I give above is of a general nature but I consider the Roth a better option for several reasons. Since your contribution to a Roth or Conventional IRA are limited, the contributions to a Roth are a higher net after-tax amount. 10,000 in a Roth IRA is worth more than 10,000 in a conventional IRA as taxes are due upon withdrawal from the conventional IRA.
Furthermore you are not required to remove money from your Roth IRA after age 70 1/2 as you are in an IRA. This allows one to keep your effective tax rate lower throughout over time, maximizing your after tax benefit.
401(k)
Advantages:
+ Matching funds from employer. Your employer matches your contribution into your 401k. It’s basically free money! ALWAYS contribute enough money to your 401(k) receive the maximum benefit from your employer.
+ High contribution rate: You can contribute up to $15,500 (for 2007) a year into your 401k, a much higher amount than either IRA option. The amount you can contribute will increase over time, indexed to inflation
+Income tax deduction in year of contribution: In the year you contribute the money to your 401k, you can deduct the amount placed in your 401(k) from your net income
Disadvantages:
-Limited flexibility: Employer plans are usually short on options. Some do allow flexibility, so inquire about your individual plan’s situation.
-Higher fees: There are always costs involved in administering complex plans such as 401(k)’s. These administration costs will sneak into the products you purchase, and can be as high as 2.5%. Dig into the paperwork and see how much you are paying.
-Excludes IRA deductibility: If you contribute to a 401(k), you reduce or eliminate the income tax deductions you can take for an IRA.
-Taxable as income upon withdrawal: When you start withdrawing the money it is taxed as income. One needs to time these withdrawals to ensure they are not too high in any year, increasing your marginal tax rate.
-Fines for removing funds early
IRA
An IRA allows anyone to deposit up to $4,000/year (for 2007) into a tax deferred retirement account.
+Low to no fees on account: Opening an IRA account at any number of Mutual Funds or brokerage houses is easy and cheap. The market is very competitive, and you should be able to find one with no fees. (The broker I use has no IRA fees, and no minimums)
+Flexibility: Through an IRA at a stock brokerage firm, the options are vast. If its publicly traded, you can buy it in your IRA.
+/- deductible? Depending upon you income bracket and participation in other retirement plans (Roth IRA and 401k’s) The money you deposit in an IRA may or may not be deductible.
-Low contribution rate, for those late in starting their retirement program, may not be enough.
-Taxed as income upon withdrawal.
-Fines for removing funds early.
-You must begin withdrawing money at age 70 1/2.
Roth IRA
Similar to the standard IRA.
+ Low to no fees on account: Opening an IRA account at any number of Mutual Funds or brokerage houses is easy and cheap. The market is very competitive, and you should be able to find one with no fees. (The broker I use has no IRA fees, and no minimums)
+Not taxed upon withdrawal. Upon retirement you can withdraw the money tax free. This is the opposite of the other options. With the IRA and 401k, you save taxes on the way in, and pay taxes on the way out. With the Roth IRA you pay taxes on the money going in and pay nothing on the way out.
+Greater availability. Anyone with an adjusted gross income of 99,000, 156,000 if married (for 2007) is able to contribute to a Roth IRA.
+Liquidity. Unlike the other two retirement options discusses, the Roth IRA allows removal of funds without penalties in certain circumstances. This feature may not be desirable; one may be tempted to dip into retirement savings for short term needs.
+You are never forced by the government to remove money.
Confused about the differences between the Traditional IRA and Roth IRA? The following detailed information should be able to answer any questions you have. If not, please give me a call.
Traditional IRA |
Roth IRA |
|
| What Are The Basics? | •
You are eligible for a Traditional IRA, regardless
of income. • Your contributions may be tax-deductible depending on your Adjusted Gross Income (AGI), and whether you participate in your employer’s retirement plan. • Contents of a Traditional IRA grow tax-deferred. Taxes are due upon withdrawal. • You can take penalty-free distributions beginning at age 59 1/2. • Distributions must begin the year you turn age 70 1/2. |
•
To be eligible for a Roth IRA, you must meet
Adjusted Gross Income guidelines. • Contributions aren't deductible regardless of AGI. • Contents of the Roth IRA grow tax-free and no taxes are due upon withdrawal, as long as you meet certain conditions. • Contributions can be withdrawn tax-free and penalty-free at any time. Earnings on contributions can be withdrawn tax-free after the account has been open for five years and you reach 59 1/2, or meet other conditions. • Distributions do not have to begin at age 70 1/2. |
| What Is The Maximum Contribution? | You
can contribute a maximum of $4,000 (for 2007) or 100% of
earned income, whichever is less. Please note your contributions to all IRAs cannot exceed $4,000 per year. |
You
can contribute a maximum of $4,000 or 100% of
earned income, whichever is less. Please note your contributions to all IRAs cannot exceed $4,000 per year. |
| Are You Eligible? | YES, you are eligible to contribute the full $4,000 per year to an IRA if you have earned income of at least $4,000 and you’re under 70 1/2 years of age. | YES,
you are eligible to contribute $4,000 per year to
a Roth IRA at any age as
long as you have earned income of at least $4,000. However, income limits apply: Single Filers: AGI must be less than $99,000 Married Couples: AGI must be less than $156,000 |
| Is Your Contribution tax-deductible? | YES,
your contributions are fully tax-deductible if
you’re: • Single and don’t participate in your employer’s retirement plan OR you do participate and your AGI is under $52,000. • Married, but neither spouse participates in an employer’s retirement plan4 OR you do participate and your AGI is under $83,000. NO, your contributions aren’t tax-deductible if you’re: • Single and participate in your employer’s retirement plan and your AGI is more than $62,000. • Married with combined AGI over $103,000 and participate in an employer’s retirement plan. |
NO, regardless of whether or not you’re an active participant in an employer’s retirement plan, Roth IRA contributions are never tax-deductible. |
| What Are The Tax Benefits? | Your
contributions and earnings grow tax-deferred
over the life of the account. You’ll experience up-front tax savings if your contributions are tax-deductible. Upon death, beneficiary’s payouts are taxed based on the beneficiary’s tax situation. |
Your
contributions and earnings grow tax-free
over the life of the account. There are no up-front tax savings for any contributions. Upon death, your beneficiaries will receive the proceeds of the account without having to pay tax as long as the account has been open for five years. |
| What Are The Withdrawal Guidelines? | At
age 70 1/2, you MUST begin taking withdrawals
from your account. Withdrawals are taxable
as ordinary income. Early Withdrawals: (Before age 59 1/2). Generally, if you take a distribution before reaching 59 1/2, you’ll owe both the tax due and a 10% early withdrawal penalty on the taxable portion of the withdrawal. You may begin making penalty-free withdrawals at age 59 1/2, but you will have to pay tax on the taxable portion of your withdrawal. |
There
are NO Mandatory Distributions
Required at age 70 1/2. You can withdraw your Roth IRA contributions tax-free and penalty-free at any time. Early Withdrawals: (Before age 59 1/2). If you take a distribution of earnings before reaching 59 1/2, you’ll owe both the tax due and a 10% early withdrawal penalty. Generally, your account must be open five years and you must be 59 1/2 to avoid penalties and taxes on earnings. |
| Are There Other Reasons You Can Withdraw Money From Your Account? | YES,
you can make penalty-free withdrawals
of up to $10,000 for first-time home
purchases. Generally, ordinary income-tax rates
would apply to the withdrawal amount. ALSO, you can make penalty-free withdrawals for qualified higher education costs (for yourself, your spouse, children or grandchildren) – generally, ordinary income-tax rates would apply to the taxable portion of the withdrawal amount. There is no fixed dollar amount or limit to the number of withdrawals that may be taken. |
YES,
you can make tax-free and penalty-free
withdrawals of up to $10,000 for the
purchase of a first home. (Account must be open
five years). ALSO, you can make penalty-free withdrawals for qualified higher education costs (for yourself, your spouse, children or grandchildren) – generally, ordinary income-tax rates would apply to the taxable portion of the withdrawal amount. There is no fixed dollar amount or limit to the number of withdrawals that may be taken. |
Adjusted Gross Income
(AGI) is generally the income amount you use for tax
purposes before subtracting itemized deductions.
v 2.5 Last Modified: 04/03/2008
| Strategic Asset
Management voice: 253-927-0998 email: solutions@sasm.com Strategic Asset Management is an investment advisory firm registered in Washington State. |
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