azkoolchik asked:

I work for the state and I have a retirement plan already with my job but they don’t call it 401K, they call it “A retirment plan” and they match me at 5 years. I wanted to the difference between 401k, Roth IRA, Reg. IRA and are there anymore other retirments plan out there that I can choose from? I was also thinking of opening a saving account and using that for retirement account, I will not touch until I’m 65 but I wanted to know do they charge on taxes awhen I take out and will I make money on the interest as more or less than with a 401K, ROTH IRA OR REGULAR IRA. If it’s not good to get a savings account to use for retirement what the advanges of getting a savings account?

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Christee Fontanez asked:

It is important to make good choices when it comes to saving for your retirement. Having a Financial Planner or Accountant review your current portfolio and your goals for the future is the first thing you should do; as they can help you determine investment vehicles that align with your risk tolerance and savings objectives.

But where do you start? Which retirement plans should you focus on? What are the differences between the various retirement plans out there?

Many Advisors would agree; that if the company you work for offers a 401(k) plan, a pension plan or a 403(b), you should take advantage of the opportunity to enroll. Typically, employers make monetary contributions towards these plans and the internal fees associated with these types of accounts are usually lower than with individual retirement plans. Because of these features, over time, it benefits you two-fold to put your money into them.

Though investing in an employer-sponsored plan has its advantages, it has some disadvantages as well. The investment options you have are usually very limited. And more often than not, you are required to name a spouse or child as your beneficiary. This being said, it is still an excellent way to save and acquire for retirement, it just shouldn’t be your only investment vehicle.

With the current trends of changing careers every 5 to 10 years, many of us will need to roll our 401(k)’s long before we actually plan to retire. Transferring or “rolling” your employer-sponsored retirement plan to a self-managed IRA may be the best option for you. Keep in mind that some companies will automatically cash out your retirement plan if the balance is under a certain amount. If this happens, they will be required to hold back 20% for taxes, and you may get hit with a 10% penalty for withdrawing the cash before 59 ½ years old. Though generally, your former employer would simply perform a direct transfer (called trustee-to-trustee exchange) to your IRA, incurring no penalties or tax ramifications.

A major benefit to IRA’s (individual retirement account) is the tax break. Contributions to an IRA reduce the income you need to pay taxes on at the end of the year. At the same time you receive this tax break, your money is also growing tax-deferred. (Meaning you do not have to pay taxes on the growth as long as the money is not being withdrawn.)

There are technically five (5) types of IRA’s: Traditional IRA, Educational IRA, SEP IRA (simplified employee pension), Simple IRA and Roth IRA.

A Traditional IRA grows tax-deferred, meaning you do not pay taxes on any of the money growing within your account. Because you are funding your IRA with money that has already been taxed, you will only pay taxes on your investment gains as you take withdrawals. Some, who qualify, may even be able to deduct their IRA contributions.

A ROTH IRA is different from a Traditional IRA in that your contributions grow tax-free. Meaning, you do not have to pay tax on your investment gains even when taking them in the form of withdrawals. Your contributions are also not deductible. If you choose a ROTH IRA, you must first open a traditional IRA, and then roll those monies into the ROTH account.

College professors and teachers have a special retirement plan or pension called a 403(b). This plan is not tied to their specific employer and can move with them as they transfer from school to school. If you’re vested (meaning you have the right to keep all the money in the account) and change schools or even careers, the amount in your 403(b) plan continues to grow tax-deferred.

If your retirement plan/pension includes stock options (ability to purchase shares of company stock), or if your employer gives shares of stock to your plan, you can keep them as the shares will be in your name. You can also sell the shares of stock for the going market rate. You have two choices should you decide to keep your shares of stock: you can continue to use your former employer as your housing agent, or you can roll the stocks into an IRA that you have opened with a brokerage firm.

There are many choices and options for your retirement investing. In addition to the research and articles you will read on your own, it is still always prudent to sit with a Financial Planner or Accountant to thoroughly review and assess your current financial situation, to determine where you are now, and how to achieve your financial goals in the future.

*** This article is intended for informational purposes only, and should not replace discussing your individual needs with your local Insurance Agent or Financial Representative.

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M. Warner asked:

Have you read the headlines? According to a recent AP report over 2 trillion dollars in retirement funds invested in traditional investments like stocks have been lost during the last 15 months. Are you one of the victims of this crazy market? Our leaders seem to be scrambling like rats to end this current crisis. So far their efforts have been in vain. What are we to do as we see our future floats down the drain? What is going to happen to our plans to send our kids to college or enjoy our retirement? What will happen if this downward spiral continues? You should think about acquiring a self directed Roth IRA invested in real estate.

When I started seeing my investments crash before my eyes, I decided it was time to seek the advice of an expert. What he told me was that investing in my company’s 401K was not the best option for me right now. My company places half of my 401k into their own company stock. That means if for some reason my company goes out of business, I will not only lose my job; I will also lose half of the money that I have set aside for my future. I never thought about that at all. He suggested that I roll over my 401K into a Roth IRA. He also suggested that I think about purchasing real estate in your IRA.

He told me with that by making this choice; I would open up my investment possibilities. I would no longer just have to invest in stocks or bonds. Instead I could choose a self directed Roth IRA invested in real estate. That is right, I could buy real estate and have the money that the property earns added to my retirement fund.

He went on to explain that in today’s iffy market a self directed Roth IRA invested in real estate is a safe bet. There are thousands of properties available for sale. Many of these properties are priced lower than they ever will be again. The government plans to buy up these mortgages so that the housing market can be stabilized. When the market and our economy stabilize, the price of these properties will go up. By investing in them now when the cost is low and waiting to sell them until the price rises, you are insuring that you will have a retirement fund in the future.

My investment counselor made sense to me. I have followed my counselor’s advice about purchasing real estate in your IRA. I trust that my self directed Roth IRA invested in real estate will secure my future.

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Bill Humphrey asked:

When IRA administrators talk to clients about the Roth IRA, the conversation often starts with excitement but ends with disappointment. Many clients discover that they are not eligible for a Roth contribution because they make too much money. Moreover, another set does not meet the even more stringent requirements for conversion of a traditional IRA into a Roth. Those that are eligible find that the maximum contribution seems so small it is hardly worth the effort. Soon these conversations will be ending on a much happier note.

One of the last changes resulting from the 2002 revision of tax laws came into action on January 1, 2006. The Roth 401(k) option, available for those plans adopting it, provides the employee the option to defer their “employee deferral” contribution to the 401(k) plan into a Roth type account. The contribution is entirely elective to the employee and is NOT subject to the income limits in place for Roth IRA contributions! Every employee participating in a 401(k) plan offering the election may now have a Roth type contribution.

For those of you who filed the facts related to the Roth IRA under “Too Good to Be True” in the circular file, here is a quick refresher:

Contributions made to a Roth are not deductible, but distributions from Roths are generally tax-free. Special rules apply if you are under 59 ½ when you take the distribution, but the tax- free option can be available even then.

Even though you don’t get a deduction currently, you are effectively prepaying tax on income in the future. Which is better for you? It is always a personal decision, based in big part on what is going to happen in your financial future. Many taxpayers conclude that paying the tax now on a smaller amount is better than paying on larger amounts somewhere in the future. Especially if they can afford to pay the tax currently, thus resulting in more money in the retirement account.

Another big advantage of the Roth is that the minimum distribution rules do not apply. Therefore, if you don’t need the money for retirement, you can keep it growing tax free in the account as long as you want, even after age 70 ½. You may also pass the account on to your beneficiaries tax-free so they don’t have to cash a big chunk of it in to pay the income taxes on it.

Since 1998, Roth IRAs have been available but not eligible for many taxpayers due to income limits imposed that phase out contributions and limit conversions. Even for those who could contribute, the maximum contributions of $4,000 or less have seemed puny compared to contributions available through company plans of up to $42,000.

With the new Roth 401(k), contributions will be available to all participants, regardless of gross income, and maximum deferral amounts will be $15,000 or $20,000 for those ages 50 or over. The other Roth rules, as described above will apply. Company match and voluntary contributions to the plan will remain tax deferred as they are currently. No conversion provisions are currently available to convert old 401(k) deferrals to Roth 401(k)s.

Since the plan will require some additional recordkeeping, some employers might not be excited to adopt the new Roth option. Talk to your plan administrator and encourage them to offer the new option as soon as possible if you see potential benefits. For those employers operating with the Entrust prototype plan, it has been revised to provide the Roth option as an election on January 1, 2006.

Those individuals with small companies or who are self-employed and who now provide a SEP plan for their employees and themselves may wish to revisit the possibility of adopting a qualified plan with the Roth 401(k) option as a valuable alternative.

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Pinkadot asked:

Me and my husband are 28. I am “savings/retirement” challenged! I know nothing. What would be the best option(s) for us? Currently we put $350/month into regular savings account and $150/month into the 457. My work also puts in 2% of my wage into a 401K.
Should we do things differently?

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Jennifer Quilter asked:

The difference between 401k and IRA plans are both small and large. You’ll find many small details that differ between the two, but for the most part, you can break it down to one main thing, your level of control.

401K plans are employer sponsored, which means you sign up for the plan through your employer and your account is handled through them. You are typically offered a few choice plans on how you will invest your money, which does take some of the control out of your investments, but some people like how this simplifies the process for them. The biggest advantage of one of these plans is that many employers will offer you a company match up to a certain percentage. So, for instance, if your company will match you up to 2%, then when you invest 2% of your income they will match that amount. This gives you more than just the money they match directly, this also gives you more money to invest and grow towards retirement, which can be a great help.

IRA, or, independent retirement accounts, are much more self directed. You go out on your own and find a company that you would like to handle your account, and you make all the decisions about how the account will be handled. While with an employer sponsored plan you are offered several plans to choose from that will decide how your savings are invested, with an independent retirement account you make all the individual decisions about how your money will be invested. You also always have the option to set up a traditional or Roth account, traditional accounts are before taxes (which means you will pay the taxes when you withdraw the funds in retirement) while Roth accounts are after taxes (which means you withdraw tax free in retirement).

So, basically, broken down, the main difference between 401k and IRA savings plans is the level of control you have, and of course, the employer match.

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Kristine McKinley asked:

Q: I am trying to decide if opening and contributing to a Roth IRA would be a better option than contributing over and above what my company matches in my 401K.

A: Ideally, it’s best to max out both your 401K and Roth IRA accounts; the more you can save for retirement the better. However, for many people this is not possible, so the question then becomes which account should I invest in first?

Generally, it’s best to invest in your 401K plan first, up to the amount your employer will match, then to invest in a Roth IRA. If you have additional funds to invest after making the maximum contribution to your Roth IRA, you should max out your 401K, and then invest in taxable accounts. There are always exceptions, however, so here are some points to consider when deciding the best order to invest your retirement funds:

Matching Contribution – many employers will provide a matching contribution when you elect to participate in the company 401K or other employer sponsored retirement plan. This is free money, and should be taken advantage of even if your 401K plan isn’t the best due to poor investment choices, high expenses, etc. There is no matching contribution for a Roth IRA, so you should invest in your 401K up to the matching contribution first, before you invest in a Roth IRA.

Investment Choices – Most 401K plans have a limited number of investments to choose from. Roth IRAs can be opened just about anywhere: mutual fund companies, brokerage firms, banks, etc., which means your investment choices are unlimited. If your 401K plan has limited or poor investment selections to choose from, the Roth IRA may be the better choice (after you contribute enough to get the matching contribution in your 401K plan).

Taxes – although your 401K contributions are tax-deferred, which allows more of your money to go to work for you, money invested in a Roth IRA grows tax free. As long as you follow the rules, you may never pay taxes on the earnings in a Roth IRA. If you expect to be in a higher tax bracket when you retire, this could result in substantial tax savings.

Because withdrawals from a 401K account are taxed at your ordinary income tax rate, withdrawals could potentially push you into a higher tax bracket. If you have a combination of 401K and Roth IRA accounts, you have greater flexibility in choosing which account to withdraw from, which could allow for tax planning opportunities to help minimize your taxes during your retirement years.

One more note regarding taxes: 401K, traditional IRAs, and other employer sponsored retirement plans are subject to the Required Minimum Distribution rules; Roth IRAs are not. Again, having Roth IRAs in combination with your 401K accounts can provide tax planning opportunities not available to people who only have 401K accounts.

Withdrawals – your contributions to a Roth IRA are available to you penalty and tax-free at any time. Your earnings in a Roth IRA may also be withdrawn at any time. There is a 10% penalty, but this penalty may be waived under certain circumstances (disabled, first time homebuyer, qualified higher education expenses and more). Withdrawals from a 401K plan are much more restricted, as employers may or may not allow early withdrawals or loans.

Automatic investments – contributions to your 401K account are automatic since they come directly from your paycheck. This makes investing in your 401K easy and convenient, and after you’ve started contributing, most likely you’ll no longer miss the money being invested. Investing in a Roth IRA takes more effort. Although many Roth IRA custodians will allow you to setup an automatic investment plan from your checking or savings account, it takes more discipline to invest in a Roth IRA than it does to invest in a 401K plan. If you think you don’t have the discipline to invest in a Roth IRA account, then investing in a 401K plan (even a poor 401K plan) is better than not investing at all.

Conclusion: Everyone’s situation is different, and there is no one specific order for retirement investing that is perfect for everyone. However, investing in your 401K up to the matching percentage, and then opening a Roth IRA is a good strategy for most people, as a combination of 401K and Roth IRAs could provide you with the best of both worlds. Both types of accounts have many benefits which can allow for flexibility and planning opportunities when it comes to withdrawals and taxes, both before and after you retire.

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Garry L. Neale asked:

A Roth IRA is a type of individual retirement account that differs from a traditional retirement account in many ways. It is an account where you can invest in mutual funds or common shares and in order to have one you will need to meet various IRS rules.

What is a Roth IRA?

The main reasons why people choose to open a Roth IRA is because of the way that the tax is set up on the account. Basically according to the rules, you make contributions only from your earned income which has already been tax deducted. Then any withdrawals which go up to the total contributions are basically federal income tax free. Any withdrawal above the contributions known as withdrawals of earnings, are free from federal income tax.

There is also a type of pensions account which mixes both traditional and Roth IRA features to form a Roth 401k. Now the this type 401k account is something which was set up in 1978. It allows people to save a certain amount of their pre-tax earnings into a savings account. Employers are in charge of putting the funds into the account and they can also choose to match your savings themselves; giving you two sources of money in the account instead of one.

All money which is in the Roth 401k account earns interest based on a tax deferred basis. Once you reach 59, you can start to get back qualified distributions from your account. The contributions which you receive are taxed at average income tax rates.

So the main difference between a Roth IRA and a Roth 401k is that with a the IRA contributions are paid in after tax has been deducted from the earnings. With the 401k, contributions are made before the tax has been deducted. When it comes to IRA limits, they do tend to be stricter than the 401k account. The IRA limits specify that you cannot contribute more than $4,000 a year if you are under 50 or $5,000 if you are over 50. However the IRS limits have been increased for 2008 slightly with $5,000 allowed to be saved if you are under 50 and $6,000 if you are over 50.

Another thing to keep in mind with Roth IRA rules is that you cannot contribute to one of these retirement accounts if you earn over $110,000 per year. You also cannot withdraw the money unless you have saved it in the account for at least 5 years.

So out of the Roth 401k and the ordinary Roth IRA, the 401k account is generally the most advantageous. The rules on the account are not as strict and there are definitely more advantages to it. So if you are thinking of setting up a Roth account, then ensure that you follow all of the IRS rules and stick to the limits. Even though there are certain restrictions on a this type account, they are still more advantageous than a traditional IRA account.

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Rocco Beatrice asked:

Answers to a dozen frequently asked questions regarding conversion to a Roth IRA

1. Can I take my 401(k) and convert it to a Roth IRA like I can a 401(k) rollover to an IRA?

This is possible. As long as the plan participant is eligible to take a distribution from the plan and the funds are eligible for a roll-over, then a 401(k) can be converted. In addition, so can 403(b) and 457 plans. It is recommended you check to see whether your current plan will allow in-service distributions. This will make those funds convertible now instead of having to wait until you stop working.

2. Can I do a partial conversion?

Yes. You can determine how much of your traditional IRA you wish to convert.

3. What if I have a non-deductible traditional IRA?

You will now have to consider the total value of all IRAs when converting. For example, if you have $500,000 in four accounts, and one has $50,000 in after-tax contributions, you will only be taxed on 90% of the amount converted.

4. Paying your taxes with the piper

Some people will say that it is okay to use funds from your IRA account to pay the tax bill that is due. Other people say this is a bad idea. Using your funds from your IRA account to pay for taxes is not recommended because if you choose to undo the conversion, all funds that were taken from the IRA that were used to pay the taxes cannot go back into the account when it is recharacterized. You would want to recharacterize the account for several reasons including if the account lost significant value between 2010 and 2011.

5. Can you convert to multiple new Roth IRAs rather than just one?

Yes, you can do this. It is best to consider converting to separate Roth IRA accounts that do not contain any other funds from other IRA accounts from prior years. It is best to convert to more than one Roth IRA and it is recommended that the conversion is to multiple Roth IRAs that each hold a different type of investment. This will make it easier to undo the conversion if the particular investment does not work out. This is an opportunity to take the losing IRA out of the picture in order to qualify for a lower tax bracket. Doing so will leave the winning IRAs growing, which will eventually create tax-free profits for you later in life.

6. When to convert some of your traditional IRA in 2009?

This is a common question, and a good one. If you believe that your tax bracket in 2009 will be lower, it may be a wise idea to begin the conversion this year. Keep in mind; you do not have to convert the entire amount in the traditional IRA. You may do a partial conversion this year and then convert the rest in the next year.

If you still have questions regarding the Roth IRA conversion process, consult with a professional. Financial professionals will be able to help you determine if the conversion will be in your best interest. They will also have the answers to any other questions that were not presented here.

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Joanne Musa asked:

Did you know that you could use money from a self-directed IRA account to invest in tax lien certificates or tax deeds? I’ve interviewed retirement account specialists from two different self-directed IRA companies; EntrustCAMA and Equity Trust Company, and I’ve learned that it is possible to invest tax free in tax lien certificates and tax deeds with a self-directed IRA.

If you use money from a regular self-directed IRA account to invest in tax lien certificates or tax deeds, than your money grows tax free until you withdraw from your account after retirement. But, if you use money from a Roth self-directed IRA, and you do not take any withdrawals until retirement age – you do not pay any taxes on your profits! So if you are using tax lien or tax deed investing as a way to save for your retirement, you need to look into this.

Although many brokerages will say that they have self-directed IRA accounts, they are not true self-directed accounts. You can only invest in anything that they sell. A true self-directed retirement account will allow you to invest in anything that is not prohibited by law. Allowable investments include real estate, tax lien certificates, tax deeds, and notes, along with other of the more usual investments. True self-directed IRA companies are prohibited to sell you investments. They can recommend types of investments that you can use your self-directed IRA for and show you how to do the paper work for them, but they are not allowed to make a commission on what you buy. There are only a handful of these companies in the country. I personally only know of three of them and I’m familiar with only two. I’ll tell you how to find out more about these two companies later.

You might be wondering if you can transfer or “roll-over” money from your present 401k or IRA into a self-directed IRA with one of these companies. What I’ve been told from retirement account specialists is that you can only roll over money from your 401k if you are no longer working for the company that your retirement account was set up with. I know that you can roll over money from a regular IRA account into a self-directed IRA because I’ve recently done that. I took money from my IRA account with TDAmeritrade and rolled it over into a new self-directed IRA account with EntrustCAMA. It was easy to do. I was able to transfer the money when I opened my new account. I downloaded the forms that I needed from their web site and mailed them in. They took care of the rest.

You also might be wondering if there are any fees associated with opening and maintaining a self-directed IRA. Yes there are some fees, but they are minimal compared to the taxes that you would be paying the government on your investment income or capital gains. Each of these companies handles fees differently and in order to see which company would work better for you, I suggest that you visit their web site or talk to a representative.

You can find out more about EntrustCama at http://www.entrustcama.com/ and you can listen to a free teleseminar/interview with Carl Fischer of EntrustCAMA at http://www.audioacrobat.com/play/WmTmzsXs. You can find out more about Equity Trust Company at http://www.trustetc.com/ and you can listen to a free teleseminar/interview Liz Koos of Equity Trust Company at http://www.audioacrobat.com/play/WvX8Qr1Q.

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Dr. Scott Brown, Ph.D. asked:

This retirement account is so new and unique that you may not have heard of it. For additional reasons, I describe in my home study course, corporate insiders may not want to offer it to corporate employees. This is because some executives only consider their employees canon fodder.

The Roth 401(k) was created when the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed. There is a provision in the law that allows employers to offer their employees the opportunity to make Roth 401(k) deferrals. Nobody paid much attention, since the new provisions applied only to tax years beginning after 2005, but now 2006 is almost here, and people are waking up.

Deductible IRAs and regular 401(k) plans work well for those taxpayers who expect their marginal tax rate to decrease during retirement because they will be making less money. This means that you’re waiting until you retire to pay taxes on dollars you make today at a higher marginal tax rates. You pay on all that money during retirement when your marginal tax rate is less.

Some taxpayers who are smart investors actually expect their marginal tax rate to either remain the same or actually increase when they retire because they are a lot wealthier from their stock investments. They also want to spend and have fun since they taught their kids well how to fend for themselves. There are many investors out there that would certainly fall into this category, even if they don’t know it quite yet from investing smart in the stock market as I teach in my home study course.

For those taxpayers who are going to be worth a boatload of money down the road, the Roth IRA used to be the absolute king. Like You pay taxes today when you aren’t worth as much but get to take it out and go on world cruises and the like after you retire (assuming certain restrictions are met). And that’s just “neater than peanut butter” for those taxpayers who expect to get whacked by the IRS on taxes when they retire. But don’t forget that the nasty drawback to the Roth IRA for many people is the fact that contributions can’t be made if income is above certain limitations.

For the Roth 401(k), this is longer the case. Beginning in 2006, a 401(k) plan may allow employees to designate some or all of their elective contributions as Roth contributions. Different from regular 401(k) contributions, which are excluded from the employee’s taxable income, any amount designated as a Roth 401(k) contribution would be included as taxable income to the employee. But when you take cash out of your Roth 401(k) contributions at retirement it is completely free from federal tax. Also, unlike regular contributions, Roth 401(k) contributions are allowable regardless of your income level. So, if you are pulling down the big bucks this allows you to have the glorious benefits of the Roth IRA account I told before that you couldn’t put money into because of your high income.

Your employer is going to kick up the administration fees but if you understand the great benefits you probably won’t mind. In order to make this Roth 401(k) thing happen, the company that administers your regular 401(k) plan will have to perform additional accounting. The Roth 401(k), and the associated earnings, will have to be maintained in a separate account from your regular 401(k) monies. Additionally, the administrator will be required to separately to separate out, on a reasonable and consistent basis, gains and losses between the designated Roth contribution account and other accounts under the plan. Because of this increased accounting requirement, I guarantee that they are going to pass on these increased fees to you to administer these types of plans.

One of the drawbacks to the Roth 401(k) plan is that no employer matching contributions or plan forfeitures can be allocated to the Roth contribution account. That means that you won’t get any matching and won’t be able to roll over dough from your regular 401(k). If you study my course carefully you will understand why you probably won’t care.

Here are some other notes relative to the new Roth 401(k) account:

• Section 403(b) Plans are eligible. While the new law specifically refers to 401(k) plans, 403(b) plans are also a go.

• Plans must be amended. Before accepting Roth contributions, 401(k) and 403(b) plans must be amended to allow for separate tracking of the Roth contributions. Again, this will be an additional expense to the employer that they will pass on to you.

• Plan changes are voluntary for the employer. There is nothing in the law that requires employers to change their 401(k) or 403(b) plans to allow for the Roth contribution. If this is the case with your employer, there is essentially nothing that you can do about it. It simply means that you will not be allowed the benefits of a Roth 401(k) with that employer. After you study my course you will understand why the executives up top may not want you to have a Roth 401(k).

• This is for a limited time only. Roth 401(k) plans are scheduled to expire at the end of 2010. Therefore, after 2010, Roth contributions could remain in the plan, but no new Roth contributions could be made after that time. Obviously, Congress could extend these provisions at some time in the future. This is likely should these plans become popular and the managing insiders let their corporations have the plan.

So it’s not too soon to start hammering your corporate employer about this plan for 2006. You can see if your employer is interested in making the plan amendments. It’s likely that the major corporations will be more interested in adding the Roth provision to their 401(k) plans than smaller corporations or businesses because of the cost but again it depends on where your employer’s executive inside interests are aligned. You’ll want to check with your employers to find out where they stand on the Roth 401(k) and how likely it might be that they will make the appropriate adoptions necessary to implement the plan.

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Max Bellamy asked:

There are many schemes available to people who want to save for their retirement. Yet the ones that are the most popular are the regular or Traditional IRA savings and the relatively new Roth IRA. To understand the concepts of the Traditional IRA and the Roth IRA, you should know what an IRA actually is.

IRA stands for Individual Retirement Arrangements. More commonly, they are also known as Individual Retirement Accounts. Both are saving plans available to anyone who has a taxable income, but they are subject to certain eligibility laws. An individual can make contributions only from compensation income, which can include wages, salaries, fees, tips, bonuses, commissions, taxable alimony, and separate maintenance payments. It does not include incomes from pension or investments.

Traditional IRA

Individuals can make contributions if they have not reached seventy and a half years of age. The eligibility rules vary from individual to individual, depending on factors such as age, income, marital status and participation in an employer-sponsored retirement plan. For example, a single person not covered by any employer-sponsored retirement plan can deduct his or her full contribution, up to the lesser of the compensation or contribution limit. Withdrawals from Traditional IRAs are subject to tax. Also, a required amount of distributions have to be made in order to avoid tax.

Roth IRA

Contributions made to the Roth IRA are tax-deductible but the earnings accrued from them are not. They are a popular way to save on tax. Also, there is no age limit to make a contribution to these accounts. This means that, unlike the Traditional IRA, with a Roth IRA, people over the age of seventy and a half years can continue to contribute funds to the IRA account. Also, it is not mandatory to make any minimum required distribution. Moreover, the contributions made to a Roth IRA are never tax-deductible, but they may or may not be tax-deductible in case of the Traditional IRA, depending on factors such as the individual’s tax filing status or adjustable gross income.

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Amaan Goyal asked:

People say a man is known by the kind of life he lives. Planning and securing funds for your retirement is the best investment you can make. Would you like to secure your golden years with complete financial independence or have an uncertain future? Have you started panning for your retirement? Have you put together a retirement plan? Is your retirement plan working?

The common mistake most people make is to postpone their retirement needs for the sake of their present needs. You need to start planning for your retirement before age starts knocking on your door. Retirement planning is not a one time exercise rather it should be looked at a life time investment strategy. If you have not started planning for your retirement, it´s never too late to make a start. To put together a retirement savings plan is easier said than done. The questions outnumber the answers. How much to save? Would it be enough? What are the instruments available which allow you benefits of years of saving along with tax benefits? The last thing you would want is to depend on your social security check from Uncle Sam. The first step towards securing your future is to start looking at today. One should look at how much he can save today to ensure financial independence at retirement.

For starters it would be a good option to consult a retirement planning specialists to explore all possible avenues for planning and securing your retirement. There are a host of retirement planning instruments available in the market today which give you the dual benefits of tax savings along with ensuring that you reap benefits of the market conditions & life insurance. A structured retirement savings plan should allow to piece together your retirement income in a step by step manner keeping in mind your current financial situation along with your retirement needs. Retirement planning is a balancing act of managing your today with your future needs.

Whether be it investing and managing your 401ks and IRAs or find retirement supplement program, you need to keep a careful eye on the decisions you make today to secure your future tomorrow. Also, is it Roth 401K & Roth IRA or Traditional 401K & Tax-deductible IRA? You need to have a strategy in place to retire and enjoy your golden years with the same lifestyle as in your early years. Procrastination on planning your retirement would leave you not only unsecured but also with an uncertain future. Put together a retirement plan today!

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Rocco Beatrice asked:

How Much Can I Contribute to a Roth IRA?

Each year, the IRA rules change. One of those changes is the contribution limits for the year. One of the main questions asked by an individual opening an account is, “how much can I contribute to a Roth IRA?” The IRA issues a chart each year that depicts what the allowable Roth IRA contributions are. These limits do change annually. That change is usually an increase that reflects inflation and the cost of living. Since a Roth IRA retirement account is designed to save for retirement, all IRA owners should be aware of the contribution limits.

When an account is opened, your eligibility will be based on your income. There are strict guidelines that must be met. These will be discussed later in this article. Currently, the maximum allowable contribution to a Roth IRA account is $5,000 per year. This amount is for anyone who is under the age of 50. So, if you are 37, you will be able to contribute up to $5,000 each year. Now, if you are over 50 years of age, you are allowed a catch-up amount of $1,000. This is in addition to the standard $5,000 limit. Therefore, individuals who are over 50 can contribute a total of $6,000 to their Roth IRA retirement plan every year.

Know What are the Contribution Limits to Your Roth IRA

As mentioned, each year, the cost of living and inflation is taken into consideration. Often times, these will result in an increase of the allowable contribution. However, there is another factor that could actually decrease what you can contribute to a Roth IRA. Your income could have a significant impact on whether you can contribute to the IRA. First of all, one of the eligibility requirements to even open a Roth IRA is that you must have a source of earned income. The IRS will then take that income and determine if you are eligible based on the income limits. These IRA limits regarding income will vary depending on your tax filing status. Currently, under Roth IRA rules, if your tax status is married filing joint or if you are a widow(er), your income limit is $169,000. This is the maximum amount you could have made in 2008 to continue contributing to your Roth IRA in 2009. In 2010, that limit is increased to $176,000. Now, if you are single, your income cannot exceed $116,000 for 2008 and $120,000 for 2009. What does this mean? Basically, you can only earn up to the stated amount to be able to contribute the maximum amount into your Roth IRA. If you exceed the set limits, you will enter a phase-out period. This is when the allowable contribution amount begins to decrease, based on your earnings. It is possible for you to completely lose the ability to contribute altogether if your income is too high.

In short, the answer to, “how much can I contribute to a Roth IRA?” will depend on these factors. As long as you meet the requirements and stay beneath the income limit, an individual under 50 will be allowed to contribute up to $5,000 a year. Over 50 will give that additional $1,000. Keep in mind that this is the maximum amount allowed. This does not mean you have to contribute this much. However, if you have a Roth IRA and are planning to save for retirement, it is suggested you contribute as much as possible.

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Jennifer Quilter asked:

When you are building a retirement plan it’s important to consider where you are investing and what the benefits are of 401k vs Roth IRA plans.

The fact that you are saving towards retirement is really the most important fact of all, so try not to be scared in your planning and take comfort that you are setting yourself up for retirement, and that is a great thing.

Everyone’s plans and needs are different, so I won’t tell you what to do, but we will look at all your options and the benefits of both accounts and with that information you can decide what is best for you.

In a lot of ways these options are very similar. You invest some of your earnings each year, usually on a monthly basis, and this money is invested in various ways that you’ve chosen. All of this is mostly managed by a company without a lot of maintenance by you. When it comes time to retire you start withdrawing money from this account to live on.

While they do have these basic similarities, when we look at a traditional 401k vs Roth IRA we see a great number of differences.

A 401K is maintained through your employer. Your employer will have a few investment plans for you to choose from, which means you have less options. Some people appreciate this fact because it makes things simpler, others want more control. Many employers offer a company match to your contributions to a point, most offering a match of somewhere between 1-6% of your salary. The money you decide to put into this plan is taken from your paycheck automatically before taxes, and when you withdraw from at the account in retirement you have to pay taxes then. You cannot withdraw from your account until you are 59 and a half years old.

With a Roth IRA (Independent Retirement Account) you are setting everything up on your own. You find a company to work with, you decide how your funds will be invested, and you make your contributions to your account on your own. The money you put into this account is taken after taxes, which means that when you withdraw funds in retirement you do not have to pay taxes on this money. You can withdraw from the account at any point, although it’s of course better to let your money grow until you reach retirement.

There are obviously a number of things to consider here when deciding where to invest, remember that you do not have to limit yourself to one option. Consider your company match, and your future tax obligations as main deciding factors when looking at 401K vs Roth IRA options.

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Marie Jakubiak asked:

One of the few things that you can still do (to possible reduce your tax bill) even after December 31st is make an IRA contribution – note that deductibility is dependent on your income level and your eligibility for other retirement plans.

A very common question is whether one should contribute to a Roth IRA or to a traditional IRA. A Roth IRA is not deductible, but it does allow for withdrawals without penalty at a future date prior to reaching age 59 ½. It does not require mandatory distributions at age 70 ½ and is withdrawn tax-free. Traditional IRAs have severe restrictions on withdrawals prior to age 59 ½. An excise tax of 10% (sometimes called a penalty tax) is mandatory if monies are withdrawn before 59 ½ and don’t meet specific exceptions. Additionally, you are taxed on the monies withdrawn at your current tax rate and computed minimum distributions are mandatory at age 70 ½.

The deciding factor in determining whether to contribute to a Roth IRA or a Traditional IRA is generally based on whether you can do without the tax break right now. The Roth IRA has no tax break in the year of the contribution, however, it’s more flexible in that you can withdraw your contributions penalty and tax free. The Traditional IRA in many instances (depending on income levels) will provide a year of contribution deduction but must follow specific rules for withdrawals, penalties may apply and required distributions upon reaching age 70 ½. Each of you must look at your specific situation. I will gladly review your situation with you if you plan to make a contribution and need assistance with your decision.

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Stuart Simpson asked:

There’s a new retirement plan soon to be available. It’s called a Roth 401k. President Bush brought this about in his 2001 tax cuts. This is a combination of two retirement funds – a 401k and a Roth IRA. But what does it mean?

Your 401k plan is pretax money set aside to grow as an investment. Your employer takes pretax money out of your check and allows you to direct the funds usually into mutual funds. 401k’s have another advantage – since it’s pretax money you take out of your check, your net pay is lowered, reducing the amount of taxes you pay. When you retire, then you draw out of your 401k what little you need and pay the taxes on it. When you retire, your income stream is gone, and so is your tax bracket. As you draw out your money from your 401k, then you hopefully enter a relatively low tax bracket and pay little on the proceeds.

Enter the Roth IRA. A Roth IRA is funded by after tax dollars. Anything put into this account will never be taxed again. You can open up your own Roth IRA account anywhere – even at a bank. Since the money is after tax, its just like you cashed your paycheck and are going shopping. The good news is you are taxed once on the front end, and then later when you remove the money, you won’t owe the government any taxes.

When you combine the two, you should be able to invest into your 401k with after tax dollars, and as it grows, and you retire, when you remove the funds, they will not be taxed. 31% of employers who have 401k plans say they plan to add this option for their employees. The bad news – your employer doesn’t have to add this as option.

Why wouldn’t I just go open my own Roth IRA and direct the funds in a mutual fund? Good question. The real advantage to the average worker is that money is taken out of your check and you won’t see the money. Makes it easier to invest. You don’t see the money as it’s taken out before they deposit your check. The #1 rule is to put money into your 401k no matter what options they give you. This new Roth 401k will start January 1st, 2006.

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