Retirement Plans

Winter, 2009

Everyone who has “earned income” should participate in some sort of retirement plan. The earnings are tax deferred inside these plans and in some cases, totally tax free. There are many types of retirement plans, but if you have earned income, you can participate in an Individual Retirement Account (IRA), regardless of your income level or whether you participate in another retirement plan.

The maximum contribution to an IRA is $5,000 this year and if you are at least 50 years old, you can contribute $6,000. If you have earned income, but your spouse doesn’t, you can contribute for yourself and your spouse. However, your contribution cannot exceed your earned income.

Roth IRA

If your adjusted gross income is less than $166,000 for joint filers or $105,000 for single filers and you are able to leave the money invested for five years from your initial investment, you should consider a Roth IRA. The earnings are tax deferred and qualified distributions are not taxable, plus there are no minimum distribution requirements. However, there is no tax deduction for the contribution.

Traditional Deductible IRA

If you are not a participant in a retirement plan, you can make a tax deductible IRA contribution. Participants in retirment plans are entitled to make deductible IRA contributions if modified adjusted gross income is less that $55,000 for singles and $89,000 for joint filers where both are active participants. If only one spouse is a participant, the other spouse can make a deductilbe IRA contribution if modified adjusted gross income is less than $166,000. Earnings are tax deferred but distributions at retirement are taxable at ordinary income tax rates.

The reasoning behind making a deductible IRA contribution is that more than likely, your taxable income will be higher now than at retirement, thereby resulting in a deduction now while in a higher tax bracket rather than later when the distribution is received.

Traditional Non-Deductible – IRA

If you do not qualify for a traditional deductible IRA or Roth IRA, your contribution will be considered a traditional non-deductible IRA. As with the other IRA's, earnings grow tax deferred, but only the earnings portion of the distribution are taxable at retirement, again at ordinary income tax rates.

Other Retirement Plans

If your company offers a 401(k), a 403(b), or Simple Plan you should participate, especially if your employer provides matching contributions. The matching contribution is “free” money deposited in your retirement plan. This year, the maximum employee contribution to a 401(k) or 403 (b) is $16,500, if you are 50 years old or older, you can contribute up to $22,000, and for a Simple Plan, $11,500 plus $2,500 catch up contribution . Your contribution is tax deferred, so it reduces your taxable W-2 income. The earnings within the 401(k), 403(b,) or Simple are tax deferred. You pay taxes on the contributions and earnings when you withdraw them at ordinary tax rates.

If you are self-employed, you have many choices in retirement plans. In addition to an IRA, you can set up a Simple Retirement Plan, a Simplified Employee Pension Plan (SEP-IRA), a Keogh Plan or a 401(k) Plan. A Simple Retirement Plan allows a maximum contribution of $11,500, $14,000 if over 50 years old. A SEP-IRA, a Keogh Plan, and a 401(k) allows a maximum contribution of $49,000.

If you currently have a 401(k), 403(b) or some other type of retirement plan with a former employer, you have the option of rolling over this money into a self directed IRA that you control. This rollover is tax-free if handled properly.

Another source of retirement funding is to invest money in an annuity or life insurance policy. The income within these plans are tax deferred and sometimes tax free. Either can be designed for your retirement needs.

We can assist you with developing and designing the right plan for you. Remember, it’s never too late to set up your retirement plan. We can also analyze your present plan to determine if it meets your retirement goals. Give us a call and let us make sure your retirement works for you.