Financial News & TipsAlan Moore / L’Observateur / September 2, 1998If you’re like most Americans, you’ve probably spent years putting off planning for your retirement. And now that you are closer to retirement,you may think it’s too late to do anything about it. Well, don’t panic. Nomatter how old you are or how little you’ve done to prepare yourself financially, you may still save for your retirement with the help of these retirement planning vehicles…Employer-Sponsored Retirement Plans Whether you’re retiring in 30 years or ten, your first choice for accumulating retirement money is through a employer-sponsored retirement plan such as a 401(k) or 403(b) plan. If you have access to sucha plan at work, make full use of it. Your contributions are made withpretax dollars, your employer may match some of your contribution, and you benefit from the effects of triple compounding-interest on principal, interest on interest, and interest on tax savings. What’s more, if you workfor a nonprofit company, your 403(b) plan offers a special “catch-up” incentive for employees who’ve worked for their employer for 15 years or who are in their last year of service.
Individual Retirement Accounts (IRAs) If you don’t have access to a company-sponsored plan, or if you’re looking for a way to add even more to your retirement savings, the Taxpayer Relief Act of 1997 offers expanded opportunities for Traditional IRAs and introduces the Roth IRA.
Roth IRAs Unlike the Traditional IRA, which is available to every wage earning individual (and recipients of alimony) under age 701/2, the Roth IRA is only available to individuals who meet the following Adjusted Gross Income (AGI) limitations: single taxpayers can make an annual contribution of up to $2,000 of earned income if their AGI is less than $95,000 or a partial contribution if their AGI is between $95,000 and $110,000. Married taxpayers filing jointly can make annual contributionsof up to $2,000 each if their joint AGI is less than $150,000 and the combined earned income of both spouses is at least the contributed amount. Married taxpayers filing jointly can make partial contributions iftheir AGI is between $150,000 and $160,000. If you exceed the AGIlimitations and are under age 701/2, you can always contribute to a Traditional IRA.
While Roth IRA contributions are not tax deductible, you will not have to pay taxes on the money when you withdraw it as long as your distributions are qualified. For distributions to be qualified, the Roth IRA must exist fora minimum of five years after the first tax year for which a contribution was made and must either be made after age 591/2, due to death or disability, or made for qualifying first-time home-buyer expenses (up to a $10,000 lifetime limit). All non-qualified withdrawals beyond cumulativecontributions will be subject to both ordinary income taxes and a 10 percent early withdrawal penalty.
Traditional IRAs Although Traditional IRAs do not offer the potential to take tax-free distributions like the Roth IRA, they may offer immediate tax relief if you are eligible to deduct your contributions. You may contribute up to thelesser of $2000 or 100% of your earned income, and any earnings grow tax-deferred until you withdraw the money. Up to $4,000 ($2,000 perindividual) may be contributed to a wage earner’s IRA and his or her non- wage earning spouse’s IRA, as long as the combined compensation of both spouses is greater than or equal to the contribution. Withdrawals mustbegin by age 701/2.
If you are single and not an active participant in a qualified retirement plan, your Traditional IRA contribution is fully deductible, even if you don’t itemize on your tax return. Joint filers, neither of whom is an activeparticipant in a qualified retirement plan, may also make fully deductible Traditional IRA contributions. A working or non-working spouse who doesnot participate in a qualified plan can make a $2,000 tax-deductible contribution, even if his or her spouse is an active participant in a qualified plan. Joint AGI cannot exceed $150,000 for the full taxdeduction or $160,000 for a partial deduction.
Single filers who are active participants in a qualified retirement plan can take a full deduction if their AGI is less than $30,000 or a partial deduction if their AGI is between $30,000 and $40,000. For marriedcouples, the spouse or spouses who are active participants in a qualified retirement plan can take a full deduction if their AGI is less than $50,000 or a partial deduction if their AGI is between $50,000 and $60,000.
Individuals who cannot deduct IRA contributions may still find a Traditional Non-Deductible IRA attractive. Even though the contribution isnon-deductible, the any investment growth in the account is tax-deferred until withdrawn.
Withdrawals from a deductible or non-deductible Traditional IRA prior to age 591/2 are generally subject to a 10 percent early withdrawal penalty.
However, the following are exceptions to the penalty: attainment of age 591/2; death or disability; withdrawals made as a series of substantially equal periodic payments (commonly referred to as 72(t) distributions); withdrawals used to pay unreimbursed medical expenses exceeding seven and a half percent of AGI; and withdrawals used by qualified unemployed persons to purchase qualified health insurance.
Variable Annuities If you still have money to invest after you’ve contributed to your employer-sponsored retirement plan and an IRA, consider investing in a variable annuity. Variable annuities offer a diversified selection ofinvestment options whose performance reflects the underlying investments’ performance. They provide a way to invest after-tax dollarsin a variety of investment portfolios, thereby allowing interest, dividends and capital gains to be reinvested without current taxation. Therefore,earnings grow tax-deferred until you make withdrawals, and there’s no limit to the amount of money you can invest. Unfortunately, however, ifyou wish to withdraw money prior to age 591/2, you will be subject to a 10 percent penalty.
Once you’ve decided which retirement savings vehicle you want to put your hard earned money into, consider your time horizon, tolerance for risk and projected rate of return, and diversify accordingly.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker Inc., a diversified financial services and securitiesbrokerage firm that is a member of the New York Stock Exchange and SIPC.)
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