Distributions are taxed upon withdrawal. Generally, the employer contributions are subject to vesting. This means the employee must be in the plan for a pre-set period of time before the contributions totally belong to the employee – even if they change jobs.

When someone leaves an employer, they often get a distribution from their 401(k) and possibly a pension plan. The proceeds of these distributions can be rolled directly into a Traditional IRA (see below) without any taxes or penalties.

Talk to your employer to see if a 401(k) or 403(b) plan is available to you and how to contribute to it. If your employer does not have a plan, opening an IRA is even more essential to your comfortable retirement.

Today there are 13 types of IRA plans. Nevertheless, the IRS has maintained the basic IRA simplicity-a fact often lost in the increased ways that the techniques are being used. As a result, numerous misconceptions are heard and repeated. The following are but a few of the IRA misconceptions and the facts concerning them:

• The acronym IRA means Individual Retirement Account. In fact, IRA stands for Individual Retirement Arrangement. There are three types of “arrangements”-an individual retirement account, an individual retirement annuity, and accounts established by employers and certain associations of employees under Code Section 408(c).
• An IRA must be established by the end of the taxable year, generally December 31. In fact, an IRA may be established as late as the time when the individual’s federal income tax return for the year is due (including extensions).
• Annual contributions to an IRA must be made by the end of the taxable year. In fact, a contribution may be made to an IRA as late as the time when the individual’s federal income tax return for the year is due (including extensions).
• The contribution rule for a SEP-IRA is the same as for a traditional IRA. Partially true. In fact, a corporation’s tax return is due on March 15. Therefore, an extension is needed to delay the contribution to a later date (see later).
• A minor cannot set up an IRA. In fact, neither the traditional nor Roth IRA has a minimum age limit. All that’s needed is taxable income. Many financial organizations, however, will not establish an account for a minor without a parent’s or guardian’s signature.
• A spouse with no income is ineligible to contribute to an IRA- In fact, in the case of a married couple with compensation filing a joint income tax return, the couple may establish two separate IRAs. The total annual contribution for both IRAs may not exceed the lesser of 100% of the combined compensation for both spouses or $4,000 (for 2001), with $2,000 (for 2001) being the limit for each individual.
• A husband and wife must establish the same type of IRA. In fact, a husband and wife do not have to contribute to the same type of IRA. For example, the husband may contribute to a Roth IRA and the wife may contribute to a traditional IRA, or vice versa.
• Pre-tax and after-tax contributions must be in separate IRAs. In fact, the IRS requires that the value of all of an individual’s IRAs be combined for the purpose of calculating the taxable and nontaxable portions of any IRA distribution. Therefore, there is no need for separate IRAs, except for minimizing substantially equal payments (an exception to the pre– 59-1/2 distribution penalty rule) and for holding distributions from qualified plans that qualify for capital gains (on employer securities) or special averaging treatment.
• A taxpayer must have a valid reason for requesting an extension. In fact, an extension is automatically granted when certain forms are filed. Individuals must file Form 4868 by the regular due date of their Form 1040. The automatic extension is four months. In the case of a partnership, for SEP, SIMPLE-IRA, or qualified plan purposes, a partnership must file Form 8736 by the return due date of its Form 1065 and all partners must also file for extensions on Form 4868. The automatic extension for a partnership is three months. A corporation must file Form 7004 by the regular due date of its Form 1120 or 1120S for an automatic six-month extension.
• Individuals who participate in a corporate retirement plan and who have earned income greater than $160,000 ma3 not contribute to an IRA. In fact, such individuals can make nondeductible contributions to an IRA until age 70-1/2.
• Transfers or rollovers may not be made from a 403(b) tax-sheltered annuity or custodial account (TSA) or an eligible 457 plan to an IRA. In fact, transfers and rollovers from a TSA or an eligible governmental 457 plan can be made into an IRA.
• Individuals may roll over an IRA once a year without being taxed or penalized. In fact, this is true-but only if the rollover payment is received in the form of a check or other property. However, an individual can request as many direct transfers as he or she wishes from one IRA trustee or custodian to another. The one rollover per 12-month period restriction applies separately to each IRA.
• No withdrawals may be made from an IRA until age 59-1/2 without payment of an “early withdrawal fee.” In fact, there are eight different ways to withdraw funds penalty-free prior to age 59-1/2. In addition to the eight exceptions, amounts transferred to an IRA of a spouse or former spouse under a divorce or separation instrument under Code Section 408(d)6) are not subject to penalty (because they are not taxable, nor deemed taxable for this purpose).
• Withdrawals must commence in the year age 70-1/2 is attained. In fact, the first distribution (the one required for the year age 70-1/2 is attained) may be distributed by April 1 of the following year; however, the second year’s distribution must also be removed in that same year.
• After age 70-1/2, a required minimum distribution (RMD) must be taken annually from each traditional IRA. In fact, although all IRAs are aggregated for calculating the RMD, the RMD may be withdrawn from any one (or more) of the IRAs.
• A non-spouse who inherits an IRA must withdraw all the funds. In fact, this depends on the IRA provider and the IRA agreement. IRA assets may have to be withdrawn by the fifth year after the original owner’s death unless distributions commence over the nonspouse’s life expectancy within one year of the death of the IRA holder.
• Once calculated and begun, the RMD amount must remain fixed. In fact, the RMD is just that-a required minimum distribution. A greater amount may be taken in any year without penalty.

A SEP allows employers to set up a type of individual retirement account, known as a SEP-IRA, for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 25 percent of an employee’s annual salary or $40,000. (Note: this amount is indexed for inflation and will vary). SEPs can be started by most employers, including those who are self-employed.

Workers age 50 and older can play “catch-up” with their retirement savings by contributing up to 100% a year over the maximum contribution limits.

Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary. A sole proprietor, partnership, or corporation can establish a SEP for the benefit of all employees.
DCU offers SEP-IRAs as a vehicle for funding the pension plan. For more information on retirement solutions for small businesses, see the U.S. Department of Labor.

Savings Incentive Match Plan for Employees (SIMPLE)

This savings option for employers of 100 or fewer employees involves a type of IRA and is the result of new legislation, the Small Business Job Protection Act of 1996.

A SIMPLE plan allows employees to contribute a percentage of their salary each pay check and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $7,000 each year by payroll deduction. Workers age 50 and older can play “catch-up” with their retirement savings by contributing up to 100% a year over the maximum contribution limits.

Employers can either match employee contributions dollar for dollar – up to three percent of an employee’s wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

Employees are 100% vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

DCU offers SIMPLE IRAs as a vehicle for funding this plan. For more information on retirement solutions for small businesses, see the U.S. Department of Labor.

Traditional IRA

• Tax deductible contributions (depending on income level)
• Withdraws begin at age 59 1/2 and are mandatory by 70 1/2
• Taxes are paid on earnings when withdrawn from the IRA
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
• Available to everyone; no income restrictions
• All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (certain exceptions apply)

Roth IRA

• Contributions are not tax deductible
• No Mandatory Distribution Age
• All earnings and principal are 100% tax free if rules and regulations are followed
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
• Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually
• Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions)

Tax Deferred vs. Tax Free

The biggest difference between the Traditional and Roth IRA is the way the U.S. Government treats the taxes. If you earn $60,000 a year and put $4,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $56,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.

On the other hand, if you put the same $4,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.

A Traditional Individual Retirement Account (or Traditional IRA for short), is a special type of account which allows investors to make tax-deductible contributions. The money can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-free until the account’s owner turns 59 1/2 years old (if money is withdrawn before this age, a 10% penalty is incurred). At this time, the account holder is allowed to begin withdrawing money from the account to fund their retirement. The distributions are fully taxed by the U.S. government. Money must be withdrawn from the account no later than the April 1 following the year the owner turns 70 1/2.

The traditional IRA was essentially the only choice until the late 1990’s when Congress passed the Taxpayer Relief Act of 1997, at which time the Roth IRA was created.

Traditional IRA Features:

• Tax deductible contributions (depending on income level)
• Withdrawals begin at age 59 1/2 and are mandatory by 70 1/2.
• Taxes are paid on earnings when withdrawn from the IRA
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  Available to everyone; no income restrictions
• All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (certain exceptions apply).

Many IRA owners are aware they can be hit hard with penalty fees if they withdraw money early. Fortunately, there are ways to avoid these fees if an emergency or other qualifying situation arises. Before we begin, let me say that even with these allowances, you should make every effort to avoid taking money out of your retirement accounts early, especially if you are young. By withdrawing money, you are losing decades of tax-free compounding which can cost you hundreds of thousands of dollars by the time you retire.

Here are some of the exceptions where you don’t havy to pay penalty if you withdraw early.

1. Permanent disability of IRA owner: Money can be withdrawn without penalty in the event the IRA holder becomes permanently disabled.
2. Death of IRA owner: It’s small consolation, but if you kick-the-bucket before you’re 59 1/2 years old, your estate won’t be hit with the 10% early withdrawal fee.
3. Withdrawals are used to pay non-reimbursed medical expenses: In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.
4. Withdrawals used to help pay for first-time home purchase: Despite a lifetime limit of $10,000, this exemption can make it much easier for an IRA owner to buy a house.
5. Higher education costs: College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.
6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA: This is not the kind of exemption for which you want to qualify, but it may save you money if you find yourself in an uncomfortable position with the IRS.
7. Withdrawals used to pay medical insurance premiums: Out of a job? The rest of the world may be topsy-turvy, but rest assured, you won’t be penalized for using retirement money to pay your medical insurance as long as you have been on unemployment for longer than twelve weeks.
8. Made on or after the day the IRA owner turns 59 1/2: Once you have reached the qualifying age of 59 1/2, you can make penalty-free regular withdrawals upon which to live.
]]> http://www.irafyi.com/?feed=rss2&p=64 0 http://www.irafyi.com/?p=60 http://www.irafyi.com/?p=60#comments Sat, 15 May 2010 13:14:10 +0000 admin http://www.irafyi.com/?p=60 You may have heard about diversification over and over but you need to know what you’re diversifying with. This article is meant to put together a quick list to help you understand different asset classes. As a retirement plan participants, you need to mix and match investments from different categories to help you diversify your retirement savings:


Short-Term Fixed Income

These types of investments include any investments that can be quickly turned into cash without losing much value. They may include investment options such as Treasury bills, Certificates of Deposit (CDs), commercial paper and money market instruments. They are considered to be among the least risky forms of investments. However, they are more likely to have a lower rate of return than stocks or bonds over long periods of time. Also, these investments actually lose value over a longer term once inflation is factored in.

Fixed Income

These types of investments are loans to a company or a government entity. Bonds issues by local city governments are good examples of this asset class. They generally carry more risk than cash equivalents, but less than stocks. Their values can go up and down, though usually not as much as stocks.

Balanced/Asset Allocation

You’ll hear “Asset Allocation” quite often. Asset allocation is a process in which your financial advisor will review your financial life and allocate and rebalance your investments to make sure a healthy balance of Fixed Income and Equity Investment is maintained.

Large U.S. Equity

These types of investments include shares of ownership in large well known companies. They generally carry more risk than other investments and have the potential for higher returns. They may be a good choice to help your contributions grow if your retirement is years away. Based on the historical data, investments in U.S. companies with large market capitalization has been a safer bet than high growth small start up companies.

Small/Mid U.S. Equity

These types of investments include shares of ownership in small to medium size companies. They generally carry more risk than other U.S. equity investments and have the potential for higher returns. They may be a good choice to help your contributions grow if your retirement is years away. Most of the companies in this asset class have small market capitalization.

International Equity

These types of investments include shares of ownership in companies operating primarily overseas with their principal place of business or principal office outside the United States. They generally carry much more risk than all U.S. equity investments and have the potential for higher returns. They may be a good choice to help your contributions grow if your retirement is years away.

Employer Security

This investment type includes the company stock that is held in trust for your benefit. This stock may be public, or readily traded in the public marketplace, or privately held. If privately held, its value will not be determined daily by the market, rather, by an independent financial advisor on an annual or more frequent basis.

It is important to understand that since you’re invested in a single stock. This is a highly risky investment and past performance is no indication of future returns. There are risks and rewards associated with company stock. The returns can be a higher rate of return than other asset classes. The risks can be greater because returns are dependent on a single stock and if, for any number of reasons, economic factors, the market or the company’s performance could result in a pronounced fluctuation in the stock price in a given period.

]]> http://www.irafyi.com/?feed=rss2&p=60 0 http://www.irafyi.com/?p=37 http://www.irafyi.com/?p=37#comments Fri, 26 Feb 2010 00:42:21 +0000 admin http://www.irafyi.com/?p=37 Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 provides additional safeguards for credit card customers. While it is not going to keep your credit card company to increase your interest rate, it would enforce new povisions for credit card companies to treat their customers fairly.
Some of the importanct changes are:
• You’ll will be notified at least 45 days before your interest rate jumps. Also, credit card companies can’t increase your rates because you’re behind on your other payments such as mortgage payment. Retroactive rate increases are largely banned with few exceptions. If your rate does go up due to default, your lower interest rate will be restored if you make timely minimum payments for six months.
• Credit card papar bills will now be required to be mailed at least 21 calendar days before actual payment is due, and this due date must be same day each month.
• No over-limit fees anymore. If you exceed your credit limit, your purchases would be rejected unless you give prior authorization.
• Biggest change will be on your statements. Your statements now must offer eye-opening educational tutorials. For example, credit card companies are now required to explain the consequences of making only minimum payment every month, including the time it would take to pay off the entire balance and total cost to you.

These changes took effect in February 2010. Take a look at your recent credit card statement to see the actual impact on you.

]]> http://www.irafyi.com/?feed=rss2&p=37 0 http://www.irafyi.com/?p=33 http://www.irafyi.com/?p=33#comments Fri, 26 Feb 2010 00:23:44 +0000 admin http://www.irafyi.com/?p=33 Most people complain that they do not have enough money to contribute to their retirement. But do you really need a lot to make a difference?
Increase your contribution just a little more today, and the difference in retirement saving could be dramatic.

Don’t Believe Us?

Take a look at the simple data table below and you will be surprised how little it takes to make a big difference.

Assumptions:

Annual income $35,000 with 25 years left to retire and 8% annual rate of return. We are also assuming you’re in 25% tax bracket(including local, state and federal taxes).

Retirement Contribution: Making a Difference
Additional Contribution	Take Home Pay Impact	Extra Cash at Retirement
2%	$10	$53,300
3%	$15	$79,900
4%	$20	$106,500
5%	$25	$133,200

]]> http://www.irafyi.com/?feed=rss2&p=33 0 http://www.irafyi.com/?p=14 http://www.irafyi.com/?p=14#comments Mon, 22 Feb 2010 02:57:39 +0000 admin http://www.irafyi.com/?p=14 According to IRS, your IRA and Roth IRA contribution limits are based on your age among other factors.
• If you are under 50 years of age at the end of 2010: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).
• If you are 50 years of age or older before 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.

Tables below shows IRA and Roth IRA contribution limits:

IRA Contribution Limits
Year	AGE 49 & BELOW	AGE 50 & ABOVE
2006	$4,000	$5,000
2007	$4,500	$5,000
2008	$5,500	$6,000
2009	$5,000	$6,000
2010	$5,000	$6,000
2011	$5,000	$6,000

Roth IRA Contribution Limits
Year	Single	Married Filing Jointly
2006	$95,000 – $110,000	$150,000 – $160,000
2007	$99,000 – $114,000	$156,000 – $166,000
2008	$101,000 – $116,000	$159,000 – $169,000
2009	$105,000 – $120,000	$166,000 – $176,000
2010	$105,000 – $120,000 Rollover Limit Removed	$167,000 – $177,000 Rollover Limit Removed

 
* Catch up contribution is only applicable for people over the age of 50.

]]> http://www.irafyi.com/?feed=rss2&p=14 0 http://www.irafyi.com/?p=4 http://www.irafyi.com/?p=4#comments Sun, 21 Feb 2010 23:38:19 +0000 admin http://www.irafyi.com/?p=1 401(k) is a section of Internal Revenue Service(IRS) code that allows special tax breaks and tax treatment to help people save for their retirement. Money deposited in a 401(k) account is taken out of paycheck pre-tax so you don’t pay any federal, state or FICA taxes on this amount. This money also earns interest compounding over the years with tax-deferred status. In short, you’re delaying your tax liabilities until you start receiving benefits in retirement. Some might argue that what is the point of delaying taxes since you have to pay them eventually?  However, if you take a closer look at the tax guidelines, you’ll notice that delaying taxes could save you thousands in long run due to the fact that most people fall in lower tax brackets in retirement as compared to their working days.
A 401(K) plan offers many benefits but here are some that you should be aware of. 
• Allowing pre tax dollars savings for your retirement. For example, if you earn $60,000/year, contribute 6% of your salary to your 401(k) account and fall in 25% income tax bracket, you’re saving $900 in federal taxes alone. That $900 a year is money that you’re investing, rather than giving to Uncle Sam. This saving is even bigger when you consider on average 7% state income taxes. While saving money in taxes is a big benefit, this doesn’t mean that you don’t ever pay taxes on your 401(k) balances. Taxes are only delayed and you pay them when you withdraw money from your 401(k) account. You are also responsible for paying taxes on the capital gain that you may have on your contribution. This usually works out great since most people in retirement are in lower tax brackets than they were when employed full time.
•  Lowering your existing take home pay and thus reducing current tax burden. Remember 401(k) contribution is pre-tax, so money taken out for 401(k) is never considered for regular payroll taxes. As most folks already know, without proper planning, tax burden could be significantly higher and saving money is your 401(k plan is a great way to avoid paying most of your income in taxes.
•  Ability to loan money against 401(k) balance to handle financial issue is another big plus. While a 401(k) loan may not be the best option to get money for your needs, it is still far better than regular unsecured loans or credit card advances because of the interest rate offered. Remember, your credit score is the key factor in dictating interest rate on your unsecured loans but loans against 401(k) account have no such requirements. You’re applying for a loan against your money and thus interest rate is significantly lower. On top of that, money paid in interest charges is deposited in your account so you’re technically paying yourself with this interest.
•  401(k) plan offers professional fund management and financial advice. Since your money is combined with other participants, total investment pool becomes sizeable and thus attracts top financial firms and managers to take up your 401(k) business. It also spreads the expenses over a bigger group thus lowering your investment expenses as an individual. If you have an investment account with a traditional investment firm, you probably know that investment fees and expenses could eat up most of your return. Also, mutual funds often charge you a front load that could be as high as 6%. A 401(k) account is a great tool in controlling your investment expenses without compromising the quality of the service.
• As 401(k) contributions are tax deductible, IRS has added maximum annual limits on the contribution allowed for a 401(k) account. Please see Contribution Limits here.
• Most employers offer a matching contribution for your 401(k) dollars. Employer matching of your contributions provides you with the possibility of earning some free money. So, if your employer offers you this opportunity, grab it. Maximize your contributions in order to get the best out of your employer’s matching. For example, An employer might offer 50% match up to 6% of your salary. What does that mean? Well, in simple mathematical terms, if you make $50,000/year and contribute 6%($3,000) of your salary towards 401(k), your employer will add an additional $1,500(50% of $3,000) to your account. While it may not look like a big amount but if you take a closer look you’ll realize that it is a 3% additional salary raise for just participating in the plan. If your employer offers a dollar-to-dollar matching, from the moment you have put your money in a 401k plan you have already experienced a 100% growth.  Bottom line, employer contribution can make a big difference in long run.
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