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Retirement Accounts, Regular Accounts, and Annuities

Why? ’Cause ya’ gotta’ put yer money somewhere!

MISCELLANEOUS TOPICS

2 Regular Taxable Accounts versus Retirement Accounts

Taxable Account Retirement Account

StocksBonds

Mutual Funds

“Cash”

StocksBonds

Mutual Funds

“Cash”

Although there are many subtle and not-so-subtle differences, the major differences are how they are taxed by the IRS, how much

money you can contribute, and what you can have in the account.

IRA, 401(k), 403(b), Roth IRA, etc.

Regular account

No limit on contributions Strict limits on contributions

Options Futures

Strict limits on investment typesNo limits on investment types

MarginingShorting

Pay taxes every year Tax-deferred (Roth IRA – tax-free)

Real Estate

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Types of Retirement Accounts Pre-tax Contributions

401(k), 403(b) for private & public employees Traditional IRA for everyone SEP-IRA, SIMPLE IRA, Keogh for self-employed Tax Break Now

Deduct contributions from income tax Pay Taxes in Retirement

Post-tax Contributions Roth IRA for (almost) everyone “Roth 401(k),” “Roth 403(b)” Tax Break Later

Tax-Free in Retirement!

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Individual Retirement Arrangement The most popular personal retirement plan Now referred to as the “Traditional IRA”

Anyone with earned income can contribute to a Traditional IRA

Contributions are normally tax-deductible (“pre-tax”) Unless you have a retirement plan at your employment

and make over a certain amount Contribution limits are increasing Investment grows tax-deferred You pay taxes on the money as you withdraw it once

you are retired Normally, after 59½ years of age

Mandatory withdraws begin at age 70½

“What? I thought it stood for Individual Retirement Account!?”

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And the IRA’s Many Cousins… 401(k) – corporations and other businesses 403(b), 457, 401(a) – public organizations SEP IRA – self-employed, small business SIMPLE IRA – self-employed, small business Simple 401(k) – self-employed, small business SAR SEP – self-employed, small business Keogh – self-employed, small business Roth IRA – “post-tax” contributions

Now “Roth 401(k)’s” – “Roth 403(b)’s”

They all work very much like the Traditional IRA except for the Roth IRA, “Roth 401(k),” and “Roth 403(b).”

6 A Pre-tax Contribution Lowers Your Taxes Now Example: 401(k), 403(b), Traditional IRA

You contribute via your paycheck: $100

Your Federal tax withholding is lowered by: $25

Your California tax withholding is lowered by: $8

Total government subsidy: $33

Your take home pay is only reduced by: $67

But the whole $100 still goes into your account

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“So What is the Catch?” You pay income tax on any amounts

withdrawn in retirement But people in retirement are usually in a lower

tax bracket If not, Congratulations!

If you withdraw the funds before retirement… You pay the income tax, and You pay a 10% penalty

Exceptions for first home purchase ($10,000), higher education, medical disability and financial hardship (hard to get accepted by IRS)

8 A Post-tax Contribution Gives No Tax Break Now Example: Roth IRA, “Roth 401(k)”

You contribute to a Roth IRA: $100

Your Federal tax withholding is lowered by: $0

Your California tax withholding is lowered by: $0

Total government subsidy: $0

Your disposable income is reduced by: $100

So Why Contribute to a Roth IRA?

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“Because a Roth IRA is So Cool!”

Tax-Free in Retirement is a Golden Opportunity No other investment choice comes close Eventually, they will probably be gotten rid of

Plus, you can withdraw the contributions at any time with no penalty You have already paid tax on the contributions

This makes the Roth IRA also an excellent intermediate-term investment account Purchase of a house or other high-ticket item Great for college expenses

Currently not used in Financial Aid calculations

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Limitations on Roth IRAs Contributions Only single taxpayers with an AGI of $112,000 or

less and married couples with an AGI of $178,000 or less in 2013 can fully contribute to a Roth IRA If you don’t qualify, Congratulations!

But you can contribute to a Roth IRA anyway If you find that you have made over the limit, you

can “recharacterize” the contributions into a Traditional IRA (which does not have the same limitations) before you file your taxes

And then you convert the Traditional IRA to a Roth I know. I know. Who voted for these bozos?

Oh, yeah. We did…

But a Roth IRA is Not for Everyone

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IRA / Roth IRA Contribution Limits

Year Under 50 Age 50 and Over

2013 5,500 6,500

Contributions are limited to the lesser of your gross salary or the maximum yearly contribution. If you make at least $5,500 in any

year, you have until April 15th of the next year to put the maximum into a IRA or Roth IRA. Your spouse is also eligible for contributions

even if he/she does not work.

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401(k), 403(b) Contribution Limits

Year Under 50 50 & Over

2013 17,500 23,000

Contributions are limited to the lesser of your gross salary or the maximum yearly contribution. (Same rules as Traditional IRA / Roth

IRA.) In other words, if you make $17,500 in year 2013, you could put your entire income into a 401(k) or 403(b) or 457. These amounts are

now indexed to inflation and go up over time. There is a loophole in the law that allows those in the public sector to “double contribute”

$17,500 into a 403(b) and $17,500 into a 457 – or $23,000 and $23,000 if you are 50 or over!

13 Tax Credit for Low Income Earners

Up to 50% of contributions Maximum of $2,000 Based on Adjusted Gross Income

$29,500 or less – single filers $59,000 or less – married filing jointly $44,250 or less – head of household

A tax credit is a dollar for dollar reduction of income taxes

If you do your own taxes, do not forget this. If you have someone do them, make sure to remind them you put money away in a

retirement account. TurboTax handles these well.

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“Roth 401(k)” / “Roth 403(b)” If your employer offers the option, you are

able to place after-tax dollars into your 401(k) or 403(b) accounts Just like a Roth IRA Employer matches will continue to be pre-tax

contributions However, contributions are not able to be

withdrawn without penalty or taxes until retirement (unlike a Roth IRA)

This is a great option for those who do not need the tax break now. However, unless your employer offers matching

contributions, I prefer the Roth IRA.

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What is an Annuity? An annuity is a life insurance product

designed to provide a guaranteed income Annuity options include income for a set number

of years, for as long as you live, or for as long as you and your spouse (or other dependent) lives if he or she outlives you

The amount you get is based on which of the above options you pick, how much you have contributed, and how well your annuity investments have performed over time Fixed annuities (invests in bonds) Variable annuities (invests in mutual funds)

16 Advantages and Disadvantages of Tax-Deferred Annuities Can be funded with retirement account dollars

or after-tax dollars No limit on contributions

Interest earned is tax deferred You pay taxes on any pre-tax annuity

contributions and all tax-deferred earnings as you withdraw them in retirement

As with other retirement plans, when you retire you will likely be in a lower income tax bracket

Downside – Very high fees! Annuity company usually takes between 1½% to

3% every year! (That is on top of the mutual fund fees!)

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Review: Account Types Regular Account

Taxes paid each year Retirement: Pre-tax Contribution

Traditional IRA, 401(k), 403(b), SEP IRA, etc. Tax-deferred (Taxes paid in retirement)

Retirement: Post-tax Contribution Roth IRA, “Roth 401(k),” “Roth 403(b)” Tax-free in retirement

Annuity High fees Earnings tax-deferred