Retirement Challenge
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Retirement Basics:
Resources
The Power of Compound Growth
Compound growth is what you earn over time on both your principal and the interest on your principal. This means that the earlier you start, the more time your money has to grow.
Eligibility
Some of these accounts have restrictions or limitations that you need to meet before you can contribute to them.
Contribution Limits
For most retirement accounts, you can’t simply stash away as much money as you want. That means you might have to use more than one type of account to meet your savings goals.
Investment Options
What type of investment options will you have access to? Low-cost index funds? Target-date funds?
Tax Benefit
This is one of the biggest deciding factors for a lot of people. For some accounts, you pay tax on the dollars you contribute now, and for others you pay tax on what you withdraw in retirement.
Withdrawal Restrictions and Penalties
These include age restrictions for when you can take the money out of your account and
Retirement Account Considerations
Compound Growth on an Investment Earning 7% Per Year
$16,000
$8,000
$1,000
Year 1 Year 10 Year 20 Year 30 Year 40
Traditional 401(k)
A retirement savings plan that is sponsored by your employer to which you contribute pre-tax dollars.
Eligibility
In order to participate in a 401(k), your employer must offer one. If they do, they may also offer a matching contribution on your behalf—although they may have a vesting policy that prohibits you from having full access to the match, which means you would not be able to access the money until after you’ve worked for the company for a minimum number of years.
Contribution Limits
The contribution limits in 2014 are as follows:
Under age 50: $17,500.
Age 50 and older: $23,000 (includes a $5,500 catch-up contribution)
The contribution limits can change from year to year, so check irs.gov for the latest information.
Investment Options
Investment options would depend on what your plan provider offers, but could include index funds and target date funds. Consider researching a fund’s rating and its fees before you invest in one.
Tax Benefits
401(k) contributions come out of your paycheck before taxes, reducing your taxable income (and thus, the amount of taxes you pay) in the year your contributions are made. Your
earnings grow tax-deferred, which means you pay taxes on your withdrawals.
Withdrawal Restrictions and Penalties
You cannot withdraw funds without penalty until after age 59½. If you take out money earlier, your withdrawals will be subject to a 10% penalty, plus taxes.
Exceptions: Hardship withdrawals allow for early withdrawal without penalties for severe
emergencies like disability, major medical expenses, or job loss at age 55 or older.
Required Minimum Distribution (RMD): 401(k)s are subject to the RMD, which is a
portion of your account you must start withdrawing each year after you retire or at age 70½, whichever is later.
401(k) Loans
Roth 401(k)
Similar to a Traditional 401(k), a Roth 401(k) is a retirement savings plan that is sponsored by your employer, except you contribute post-tax dollars.
Eligibility Same as a Traditional 401(k) Contribution Limits Same as a Traditional 401(k) Investment Options Same as a Traditional 401(k) Tax Benefits
Your contributions to a Roth 401(k) are made after taxes, which means you receive no tax deductions on your contributions. However, your withdrawals after age 59½ are tax free! If your employer offers both a Traditional and a Roth 401(k), then you may be able to split your contributions between the two types of accounts.
Withdrawal Restrictions and Penalties
Withdrawals after age 59½ are tax free. Early withdrawals are subject to a 10% penalty unless you qualify for a hardship withdrawal.
Traditional IRA
A type of individual retirement account to which you contribute pre-tax dollars.
Eligibility
In order to contribute to an IRA, you have to have earned income. If you don’t have earned income, you can open a spousal IRA if your spouse has earned income.
Contribution Limits
The contribution limits in 2014 are as follows:
Under age 50: $5,500
Age 50 and older: $6,500 (includes a $1,000 catch-up contribution)
Whether you can make the full contribution, and receive the tax deduction for it, however, depends on a number of factors. If you don’t have a retirement plan offered to you at work, you can deduct up to the full contribution limit. If you do have access to a retirement plan at work, then whether your can make full, partial or no contributions depends on your income and filing status. It’s important to check irs.gov for the latest information.
Investment Options
exchange-Tax Benefits
Your Traditional IRA contributions are tax deductible, which means they could help reduce your tax bill in the year you make the contributions. Investments inside of your Traditional IRA also grow tax-deferred, which means you pay taxes on them when you withdraw. If you don’t meet the requirements that allow you to deduct your Traditional IRA contributions, you can still make contributions, but the deductions won’t be tax-deductible. Use IRS Form 8606 to keep track of these nondeductible contributions.
Withdrawal Restrictions and Penalties
Withdrawals from a traditional IRA after age 59½ are subject to income tax. If you withdraw earlier than that, you will be subject to income tax, plus an additional 10% penalty and a state penalty, where applicable.
Required Minimum Distribution (RMD): Traditional IRAs are subject to the RMD, which is a
portion of your account you must start withdrawing each year after you retire or at age 70½, regardless of whether or not you’re employed.
Roth IRA
Similar to a Traditional IRA, a Roth IRA is a type of individual retirement account, except you contribute post-tax dollars.
Eligibility
As with a Traditional IRA, you, or your spouse, has to have earned income. However, if you exceed IRS-specified income limits, based on your tax filing status, you can’t contribute to a Roth IRA. You should check irs.gov for the latest rules.
Contribution Limits
The contribution limits are the same as a Traditional IRA.
Investment Options
The investment options are the same as a Traditional IRA.
Tax Benefits
A Roth IRA is funded with post-tax dollars, just like the Roth 401(k). When you withdraw your money after age 59½, those withdrawals are tax-free.
Withdrawal Restrictions and Penalties
Taxable Brokerage Account
A type of investment account that you can open directly with a brokerage firm.
Eligibility
No eligibility requirements.
Contribution Limits
No contribution limits.
Investment Options
Compared with other retirement accounts, taxable brokerage accounts may offer you the most flexibility with investment options, which may include stocks, bonds, mutual funds, index funds, exchange-traded funds and more.
Tax Benefits
Taxable brokerage accounts are funded with post-tax dollars, and you may be subject to capital gains tax when you sell an investment at a gain.
Withdrawal Restrictions and Penalties
Exercises
Choosing an Account: Considerations
If your tax-filing status is single*By income, we mean your modified adjusted gross income. This convoluted name reflects the convoluted way in which it is calculated. First you subtract various items, such as education expenses or IRA contributions, from your income to determine your adjusted gross income (which is used for tax purposes). Then you add back in other items, such as student-loan deductions and foreign income, to get your modi-fied adjusted gross income.
+The rules for eligibility and contribution limits for a Roth IRA change every year. In 2014, if your modified adjusted gross income was less than $114,000, you could contribute the maximum amount, which was $5,500 (or $6,500 if you were fifty or older). If your modified adjusted gross income was between $114,000 and $129,000, you were eligible to make a partial contribution.
**$23,000 is the combined 401(k) and IRA contribution limit, $17,500 and $5,500 respectively (in 2014).
Under $129,000 $129,000 or more $129,000 or more $129,000or more Under $129,000 Under $129,000 No Yes Yes Yes No No No No Yes Yes DO YOU HAVE A 401(k)? How much is your income?* How much is your income?* How much is your income?* Does your employer
match your contribution?
No Yes
Contribute to a Roth IRA. + Once you reach the maximum contribution,
open a taxable brokerage account.
Contribute to a Roth IRA+until you’ve maxed it out, and put the rest in your 401(k).
Great! Max out your 401(k) and a Roth IRA;**
then opena taxable brokerage account.
Contribute to a Roth IRA+until you’ve maxed it out, and put the rest in your 401(k).
Great! Max out your 401(k) and a Roth IRA;**
then opena taxable brokerage account. Contribute enough to get the full match and put the rest of your retirement contributionsin a Roth IRA.+ If you can afford to contribute more than the match plus $5,500, put the extra into the 401(k) until it’s maxed out.
Great! Max out your 401(k ) and a nondeductible IRA;
then open a taxable brokerage account. Great! Max out your 401(k)
and a Roth IRA;** then open a taxable brokerag
account.
Great! Max out your 401(k) and a nondeductible IRA;
then open a taxable brokerage account. Contribute to a deductible
IRA. Once you reach the maximum contribution, open a taxable brokerage
account.
Can you contribute more than $23,000
annually?**
Can you contribute more than $23,000
annually?**
Can you contribute more than $23,000
annually?**
Can you contribute more than $23,000
If your tax-filing status is Married Filing Jointly Under $191,000 Under $191,000 No Yes Yes Yes No No No No Yes Yes DO YOU HAVE A 401(k)?
How much is your household income?*
How much is your
household income?* household income?*How much is your Does your employer
match your contribution?
No Yes
Contribute to a Roth IRA. + Once you reach the maximum contribution,
open a taxable brokerage account.
Contribute to a Roth IRA+until you’ve maxed it out, and put the rest in your 401(k).
Great! Max out your 401(k) and a Roth IRA;**
then opena taxable brokerage account.
Contribute to a Roth IRA+until you’ve maxed it out, and put the rest in your 401(k).
Great! Max out your 401(k) and a Roth IRA;**
then opena taxable brokerage account. Contribute enough to get the full match and put the rest of your retirement contributionsin a Roth IRA.+ If you can afford to contribute more than the match plus $5,500, put the extra into the 401(k) until it’s maxed out.
Max out your 401(k)and put any extra you have in a
nondeductible IRA
Great! Max out your 401(k) and a Roth IRA;** then open a taxable brokerag
account.
Great! Max out your 401(k) and a nondeductible IRA;
then open a taxable brokerage account. Can you contribute
more than $23,000 annually?**
Can you contribute more than $23,000
annually?**
Can you contribute more than $23,000
annually?**
Can you contribute more than $23,000
annually?** $191,000
or more Does your spouse
have a 401(k)?
$191,000
or more $191,000Under $191,000or more
Yes No
Contribute to a deductible IRA. Once you reach the maximum contribution, open a taxable brokerage
account. Contribute to a deductible
IRA. Once you reach the maximum contribution, open a taxable brokerage
account.
*By income, we mean your modified adjusted gross income. This convoluted name reflects the convoluted way in which it is calculated. First you subtract various items, such as education expenses or IRA contributions, from your income to determine your adjusted gross income (which is used for tax purposes). Then you add back in other items, such as student-loan deductions and foreign income, to get your modi-fied adjusted gross income.
Retirement Accounts Inventory
TYPE
(401(k), Roth 401(k), Traditional IRA, Non-Deductible IRA, Roth IRA, Taxable Account)
DOES YOUR EMPLOYER MATCH?
PERCENT
MATCHED CURRENTCONTRIBUTIONS HOW OFTEN DO YOU
CONTRIBUTE
You Made It!
Next Steps to Consider
Research your employee-sponsored retirement account options and any matching or vesting policies.
If you’ve decided to do so, enroll in your employee-sponsored account
If you’ve decided to open additional retirement accounts, research brokerage firms and the investment options they provide.
Once you’ve decided upon a provider you like, open up any additional retirement accounts.
Set up automatic contributions to your accounts.
If you aren’t contributing up to your 401(k) company match, try to do so—or set
calendar alerts to boost your contributions every six months until you are meeting your match.
Schedule quarterly or annual calendar reminders to review your investments to see if they need rebalancing.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial *$24.99 will be credited to the cost of the set-up fee for the 5-Year Planner or the Portfolio Builder. Enter code: 67GX432UTM at checkout to redeem. Cannot be combined with other offers.
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