Retirement InvestingThe good thing about retirement is that our retirement date can be set by us. We do not have to wait for pension or social security; we can save our own retirement nest egg. Surely we will take any pension that we have coming and collect social security when the time comes, but we no longer have to depend on someone else to finance our golden years or tell us when they start. How should we go about retirement investing to make this possible? 401 K Plans If you work for a company that offers a 401 K plan take advantage of it, especially if they match some portion of your contribution. In 2007 you can contribute a maximum of $15,500 into your 401 K. If you are over 50 years old you can also contribute a catch up amount of $5,000 for a total of $20,500. These are fantastic plans for freeing you to take control of your future and can be the backbone of your retirement investing plan. Assuming you contribute only $12,000 per year, not accounting for any matching funds, and using the returns from the average for a balanced index mutual fund you would have received the following returns. The balanced mutual fund used in this example is the Vanguard Balanced Index Fund. This fund invests 60% of it’s assets to match the Wilshire 5000 Equity Index and 40% to match the Lehman Brothers Aggregate Bond Index. IRA Accounts IRA’s (Individual Retirement Accounts) are the next best option for your retirement investing plan. They are not tied to your workplace at all and are controlled by you. There are maximum contribution limits and stipulations on withdrawal. Excuse me for the length of the following information, but this is the information that you will be looking for before you invest in an IRA.
Roth IRA – Eligible at any age as long as you have earned income (subject to income limits below); a nonworking spouse of a wage earner.
Traditional IRA – Earnings grow tax-deferred; potentially tax-deductible contributions. You can deduct the contribution amount from your earnings when your file you tax return if you meet the criteria shown in the tax deductible contributions section below. Roth IRA – Earnings grow federally tax-free; distributions are federally tax-free. You cannot deduct contributions from your earnings.
Traditional IRA - $4,000 for tax year 2005-2007. $5,000 for tax year 2008. After 2008 the limit is adjusted for inflation in $500 increments. Catch-up contributions for workers age 50 and older (as of year’s end): $1,000 extra in 2006 and thereafter. Roth IRA – Maximum annual contributions are the same as the traditional IRA.
Traditional IRA – Yes, depending on participation in employee sponsored retirement plans and modified adjusted gross income (MAGI). Full deductibility of contributions for active participants in a retirement plan whose MAGI is $75,000 or less (joint) and $50,000 or less (single) for 2006. To read the partial deductibility rules visit Vanguard.com. If you do not participate in an employee sponsored retirement plan then your contribution is fully deductible regardless of your income or tax filing status. Roth IRA – No
Traditional IRA – Individual stocks, mutual funds, bonds, and options; certificates of deposit (CDs). Roth IRA – Same as a Traditional IRA
Traditional IRA – Earned income at least equal to IRA contribution. See deductibility rules above. Roth IRA – Earned income at least equal to IRA contribution.MAGI limits to be eligible for a full contribution: up to $95,000 for singles, up to $150,000 for joint filers.MAGI limits to be eligible for a partial contribution: $95,000 - $110,000 for singles; $150,000 - $160,000 for joint filers.
Traditional IRA – Ordinary income tax on withdrawals of earnings and deductible contributions.No federal taxes on withdrawals of nondeductible contributions.State taxes may apply. Roth IRA – Tax-free earnings if you hold the account to at least 5 years and are 59½ or older upon withdrawal, or if your withdrawal qualifies as an exception.State taxes may apply.
Traditional IRA – 10% penalty tax if you’re under age 59½ and the withdrawal does not qualify as an exception to the tax. Roth IRA – For accounts held less than 5 years and the owner is under age 59½: Distributions from contributions are tax-free and penalty-free.The 10% penalty tax applies on distributions of earnings if the withdrawal does not qualify as an exception to the tax.
Traditional IRA – Required minimum distributions (RMDs) must start at age 70½. Roth – None during the IRA owner’s life. Beneficiaries must take mandatory distributions. Assuming you contribute the full $4,000 per year (the 2005 maximum), not accounting for any increase in future years, and using the returns from the average for a balanced index mutual fund you would have received the following returns. How to invest your retirement dollars is the tough question. The stock market can be like a roller coaster and everyone has a different tolerance for these ups and downs. Also, not everyone wants to have to monitor their investments daily. For those that do not want to keep track of their investments I recomend that you invest in a group of mutual funds that encompass a wide array of market sectors. Visit the mutual funds page to learn more. If you want to take more control over your investments take a look at the stock trading page. This is the system that I am currently using am quite pleased with. One last thing that I would like to mention is pension plans. In past years we could rely on pension plans from companies that we worked for to comfortably fund our retirement. I do not believe that we can count on them any longer. Many retirees have lost their pension funds in recent years. In this day and age we should do everything that we can for ourselves to save enough money to take care of our own retirement.
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