Retirement or Re-routing?

When I was in my twenties, the idea of retirement seemed a death sentence. Anxious to establish a place for myself in the professional world, I found the prospect of unstructured time terrifying and wasteful.

Now, in my fifties, I find the prospect of retirement seductive, even compelling—not something to be pushed to the end of one’s life like an afterthought, but something that must be planned for, actively pursued while there is yet time.

However, when I made the announcement that I would be taking an early retirement from my teaching profession, I was not prepared for some of the comments I received. “What will you do with your time?” ”Are you happy?” another colleague asked me six months into my retirement. ”Are you truly happy?”

The question misses the point— retirement is not so much an issue of happiness (in the way Freedom 55 ads would like us to believe) as it is an issue of integrity. The decision to leave the professional world is just as serious as the decision to work till one’s dying breath. The question ”Are you happy?” I fear, comes from the bias of our highly production-conscious society. Work is considered legitimate only if it produces something tangible. And a good life is one that is obviously productive, defined by traditionally external measures of success such as schedules, visibility, profit and status. How can one who opts out of the professional life be happy?

Perhaps an answer can be gleaned from Impressionist Artist Claude Monet whose life shifted in a somewhat new direction when he turned 50. At 21, Monet was conscripted into the army. His father bought him out of military service on the condition that he received formal art training in Paris. Every fiber in Monet resisted classical training; what he wanted most was to paint outdoors. Rejected by the Salon in his early career, he persisted in painting the way he saw, insisting that his eyes were all he needed. Refusing to allow theory to eclipse his sight, he traveled extensively, to the outlying shores of France, London, Holland, the Mediterranean Coast to capture the dramatic and exotic in landscapes.

It wasn’t until 1890, when his art generated tremendous enthusiasm in New York that he became financially secure. 1890 was a watershed year. Monet turned 50 and the property at Giverny which he had leased a few years before, became legally his own; he was able to purchase it outright for 22,000 francs. Instead of continuing in the same vein as he had through most of his life,– traveling, painting exotic landscapes that were highly lucrative on the market– Monet retired to his country cottage at Giverny and started a flower garden.

What were the reasons for this dramatic change? Financial security was part of the answer. The other part, I think, had a great deal to do with Monet’s sense of integrity about what he wanted to do with his life. Released from bread and butter issues, he could finally pursue a path that he could call his own. ”My garden is slow work, pursued with love and I do not deny that. What I need most of all are flowers, always, always.” And flowers he grew—a whole feast of them—tulips .lilacs, marigolds, dahlias, nasturtiums, all arranged with an eye for color and light.

It was a self-contained world—the paintings mirroring the garden, the garden mirroring what he perceived to be the incredible mystery of light and atmosphere. Yet by no means was it a trivial world; in pursuing what he loved, Monet had entered what most of us yearn for but deny ourselves because of lack of time—the deepening of spiritual experience. He had begun to answer the need that surfaces when our bodies begin their dissolution (usually around 50)—the need to deepen ourselves, move down into the earthy layers of our psyche and take root.

This rooting is most evident in Monet’s later series of paintings on grainstacks and water-lilies, paintings that he replicated laboriously at different times of the day in order to pursue the subtle nuances of change that accompany perception in time. These subjects were, from the perspectives of market in the late 1800’s, very limited and compromising because of their ordinariness. But passionate about this work, Monet delayed several times to honor requests for more profitable and exotic pieces he had contracted to various art dealers and journals. What was his excuse? Working on the grainstacks. Money was no longer important now, but the integrity of his passion was.

A friend once told me that retirement should be more appropriately called “re-routing,” that is, taking a different route, a more personal route, a route less traveled but no less rewarding. It is a re-routing to the unlived life that has been pushed to the periphery by the demands of livelihood, parenthood, ambition: the kids need to be fed and you have to prove yourself to the world. Paying attention to our dreams and yearnings takes time. Listening to the voice of inner guidance, working to connect with spirit–all these take time. To a world consumed by schedules and productivity, re-routing might seem like wasting time. But it is only within the luxury of time that roots can grow.

Consumer Scams: How to Avoid Becoming a Victim

(ARA) – Unfortunately, tough times can bring out the worst in some people. That’s especially true of scam artists who prey on those who are down on their luck or who can be easily intimidated.

Scam artists are anything but artists. They’re criminals who use a variety of tools, including the U.S. mail, telemarketing and the Internet to part you from your hard-earned money. Believe it or not, some are so good at what they “sell,” they’ve persuaded people to mortgage or refinance their homes in order to participate in phony sweepstakes, pyramid schemes, investment offers and other scams. In fact, there’s even a breed of scam artists who specialize in “helping” people recover money they’ve lost to other scammers.

Scams and fraudulent activity take on many shapes and forms. Some of the most common scams involve offers of working from home, free travel or gifts, sweepstakes and contests, avoiding a foreclosure, getting out of debt, investing in real estate and chain letters, just to name a few. Unfortunately, common myth holds that only low-income, unsophisticated, blue-collar workers and the elderly are victims of scams. Not true. Highly educated and wealthy individuals have been scammed for millions from seemingly trustworthy business executives.

Federal and state laws prohibit unfair or deceptive trade acts or practices, according to FindLaw.com, the world’s leading online source for legal information. If you think you’ve been cheated, you should immediately contact local law enforcement authorities, the city or county prosecutor, or the state Attorney General’s office. Your state may also offer a consumer protection agency that can provide advice. The more agencies you notify, the more likely someone will take notice of your complaint and act on it.

In addition to contacting local government authorities, FindLaw.com recommends contacting the National Fraud Information Center (www.fraud.org), which is maintained by the National Consumers League. The NFIC provides assistance in filing a complaint with appropriate federal agencies and offers recorded information on current or popular scams and frauds, as well as tips on how to avoid becoming the victim of one. Victims of identity theft should contact a special hotline created by the Federal Trade Commission at (877) ID-THEFT (877-438-4338).

If law enforcement agencies take legal action, they will try to recover your money, but it’s not always possible. If you paid with a credit card or the money was debited from your bank account, you may be able to dispute the charges or debit. Contact your credit card issuer or bank immediately. If the charge was on your telephone bill, contact the company that sent you the bill to find out how you can dispute the charge.

Also consider contacting an action line provided by local newspapers, radio stations, or TV stations. In larger metropolitan areas, some media organizations enlist volunteers who will pursue consumer complaints.

Another way to attempt to get your money back is to bring a lawsuit against the scammer. However, this may not be feasible unless the seller is a local resident and all but impossible if you’re the victim of an international identity theft scam, which have become all too common these days. If you plan to sue, first send a demand letter explaining the problem and asking for your money back. Many states require such a letter before you sue.

The best weapon in the war on scams is to avoid becoming a victim in the first place. Here are 10 tips from FindLaw.com to help you avoid becoming the victim of a scam:

1. Use common sense. If it sounds too good to be true, it probably is. Or, if it looks like a scam and smells like a scam, it probably is a scam.

2. Screen your phone calls. If you see phone calls coming from a number you do not recognize, or you see “anonymous” or “unknown caller” come up on your telephone, do not answer and allow the call to go to voicemail. Like telemarketers, scammers rarely leave messages. Better yet, sign up for the national “Do Not Call” list. It’s easy: call (888) 382-1222.

3. Beware of any Web sites, mailings, etc., which seek personal information. Avoid giving out your credit card, checking account or social security number.

4. Walk away from salespersons that use high-pressure sales tactics and insist on an immediate decision. Never deal with any salesperson who attempts to scare you into purchasing something.

5. Avoid being placed on “sucker” lists. Avoid filling out contest entry forms at fairs and malls or on the Internet. Especially avoid contests where you need to go to another location to see a sales presentation to “earn” your prize. Avoid solicitations in which you have already been specially selected or awarded a prize, but you haven’t entered a contest.

6. Know with whom you’re dealing. If it’s an unfamiliar company or charity, check it out with your state or local consumer protection agency and the Better Business Bureau.

7. The common thread that runs through most telemarketing, mail and Internet scams is the demand for payment upfront. Never consent to a request for a direct bank deposit or a certified check  or offers to send a courier to your home to pick up your check.

8. Avoid pyramid schemes that often take the form of chain letters, gifting clubs, or multi-level or network marketing. Pyramid schemes depend on people recruiting other people to join the scheme, with the hope that one day, you will reach the top of the pyramid. That rarely happens because eventually the scheme runs out of people, and then the people who start these schemes walk away with everyone’s money.

9. Beware of work-at-home schemes, such as being paid to take surveys, mystery shopping, or network marketing (recruiting friends to sell a company’s products). These are often set with the trap of paying upfront for “product samples.” If you need to buy something to participate, run, don’t walk away.

10. If you receive an item in the mail that you never ordered or paid for, it’s considered a gift. If you get bills or collection letters from a seller who sent you something you never ordered, write to the seller stating your intention to treat the item as a gift. If the bills continue, insist that the seller send you proof of your order. If this doesn’t stop the bills, notify the state consumer protection agency in the state where the merchant is located. You can also complain about mail fraud to your local U.S. Attorney’s office, and the local postal inspector.

Article courtesy of ARA Content

Protect Yourself from Identity Theft

(ARA) – If you had to venture a guess, what would you think is the fastest growing crime affecting older Americans? Years ago, burglary and robbery topped the list. Today, it’s identity theft.

According to Consumer Sentinel, the complaint database developed and maintained by the Federal Trade Commission, 22,191 seniors across the country fell victim to the crime in 2004. The 2005 statistics, which haven’t been released yet, are expected to be significantly higher.

“Identity theft is a crime of opportunity and the bad guys often target seniors because they perceive older adults as the most vulnerable members of our society; but armed with knowledge, you can protect yourself from becoming a victim,” says Dennis Everett of Dignity Memorial’s Smart and Safe Living program. He points out a good place to start is with a working knowledge of how the crime is perpetrated.

How do thieves get your information?

According to The Identity Theft Resource Center, a national non-profit organization founded in 1999 by a woman who fell victim to the crime, there are many ways. Thieves may steal your mail or wallet; go through your trash can, looking for papers with personal information; listen in on conversations you have in public; or trick you into giving them the information over the telephone or by e-mail.

They may also obtain your personal information by purchasing it on the Internet or from someone who has already stolen it; by taking it from a loan or credit application form you filled out or from files at a hospital, bank, school or business with which you deal; or by retrieving it from dumpsters outside of such companies.

What can you do to protect yourself?

• Check your credit reports once a year from all three of the credit reporting agencies — Experian, Equifax and TransUnion.

TransUnion: (800) 888-4213 www.tuc.com
Experian: (888) EXPERIAN www.experian.com
Equifax: (800) 685-1111 www.equifax.com

• Guard your personal information. Be very careful about giving out your Social Security Number (SSN)

• Don’t put your SSN or drivers license number on your checks.

• Destroy papers you throw out, especially those with sensitive or identifying information. A crosscut paper shredder works best.

• Be suspicious of telephone solicitors. Never provide information unless you have initiated the call.

• Do not reply to and delete suspicious e-mail requests.

• Use a locked mailbox to send and receive all mail.

Article courtesy of ARA Content

Get More from Your Credit Card

(ARA) – As we move closer to what will be a virtually cashless society, the number of ways we will be able to use credit will continue to increase. This trend underscores the importance of selecting the right kind of credit card that offers the features, tools, services and rewards that are designed around the specific ways you choose to use credit. Consumers can ensure they are getting more from their credit card by keeping the following recommendations in mind.

Relevant Account Management Features

The more you use your credit card, the more important it is to have complete control over your account. For example, selecting a credit card that lets you choose your own payment date, or even schedule your payments in advance, is a great way to manage your monthly finances on your own terms. Card programs that offer e-mail alerts that remind you when your due date is approaching or when you are reaching your credit limit are also useful for keeping your payments and spending on track.

Maximize Your Rewards

Today’s rewards cards provide all the conveniences of a credit card along with great offerings like cash back, discounts on select merchandise, miles and more. But with so many options to choose from, the key is finding a credit card rewards program that offers easy ways to accelerate those rewards, based on how you use credit. For example, the Discover More Card offers the Get More program, which lets cardmembers get 5 percent “Cashback Bonus” in popular categories that change four times a year like gas, travel, apparel, restaurants, movies and more. This program is appealing to millions of consumers, since the categories rotate and coincide with their spending patterns during the year.

Make Your Money Go Further

Many credit cards allow customers to opt for either rewards points or cash back on their purchases. But when it comes to using those rewards, flexible redemption options are just as important, such as the ability to redeem rewards as a statement credit, a direct deposit or gift card.

Look For Extras

Many cards offer additional benefits beyond cash back on your regular purchases. For example, some cards offer:

• Discounts of 5 to 20 percent off when you shop at top online retailers
• The opportunity to increase, and even double your rewards when you redeem them for brand-name gift cards or e-certificates * Cash over your purchase at the register without paying a transaction fee
• Free travel benefits such as accident insurance or access to a helpful travel hotline

Some cards even boast all these features. Make sure to pick a card that offers a strong package of meaningful discounts, extra perks and relevant benefits.

Select a Card that’s Backed by Exceptional Customer Service

Being able to get help with your account 24/7 is critical. Online help options are important, but also make sure your credit card company has a good reputation for fast and knowledgeable customer service. You want to make sure that a representative is committed to solving any issues in the most effective and efficient way possible.

Use Your Card with Confidence

People are using credit cards in more places and in more ways than ever before, so it’s critical to protect yourself from unauthorized charges or fraud. Make sure your credit card offers advanced and convenient fraud protection, especially a $0 fraud liability guarantee that ensures you are never held responsible for unauthorized charges — online or offline, anytime and anywhere.

Article courtesy of ARAcontent

Getting Retirement Advice from a Financial Advisor

If you are planning for your retirement it is a good idea to meet with a financial advisor. You may have a number questions. After all, soon-to-be retirees want and should have all of their bases covered. Of course, you can find retirement advice online or seek answers from those you know, but there a number of benefits to meeting with a professional financial advisor. Here are five reasons that are outlined below.

1 – Knowledge and Expertise

While anyone can claim to be a financial advisor, a small amount of research or recommendations from those that you know can help you ensure that you are dealing with a true professional. When doing so, you should receive valuable information. Most financial advisors are trained and experienced in the world of finance, as well as retirement. You might want to consider a Certified Financial Planner (CFP) who is a professional that has passed certain testing and experience requirements. In general, you should feel comfortable and trust the advice given to you by a financial advisor.

2 – Realistic Goals

Another benefit to meeting with a financial advisor is that he or see can make sure that your feet are on the ground. Unfortunately, many men and women get carried away with their retirement goals. If you want to start a business, you may be able to so. If you want to spend your days vacationing, you should also be able to do so. But, only if you have enough money saved. A financial advisor can let you know if it is even possible for you to meet your retirement goals in the remaining time that you have left to save.

3 – A Good Value for the Money

Scheduling a meeting with a financial advisor will cost you money and this is a problem for some. After all, to save for retirement, you are supposed to be saving money and reducing your expenses. While this is true, meeting with a financial advisor can be considered an investment. The small appointment fee is one that you can easily make a return on, should you adhere to the advice provided by your financial advisor.

4 – Easy to Schedule an Appointment

Many soon-to-be retirees donít want to go through the trouble to find and then schedule an appointment with a financial advisor. Doing so doesnít have to be difficult. First, ask for recommendations from those that you know and then call to make an appointment. The internet can also be used to research and find quality and reliable advisors. Your local bank may also be able to provide you with assistance.

5 – The Consequences

The consequences of not meeting with a financial advisor or not being prepared for your retirement are enough reason why you should schedule an appointment. At this point in your life, you should have been contributing to your 401(k) and you should also have an Individual Retirement Account (IRA) with money in it. If not or if you donít even know what these accounts and plans are, you need to meet with a financial advisor right away.

As you can see, there are a number of benefits to scheduling an appointment with a financial advisor. A financial advisor does more than an accountant. In addition to helping you save money, they can also help you determine exactly how much money you need to retire comfortably. Yes, you can develop this total on your own, but financial advisors know to take other factors into consideration as well, such as medical emergencies and inflation. Do you?

Have You Set Up Your Retirement Plan Yet?

Do you have your retirement funds tied up in your company’s plan? Are those investments working for you? Or are you an individual interested in retirement planning but have yet to decide on which plan to choose? Do you know what time of investments yield a higher rate of return? If you want more information about how 401k, IRA, Roth Ira plans work and which investment choice provide the best return this article is for you.

First let’s take a look at 401K plans. 401K retirement plan accounts are established by your employer and are offered as part of your benefit package. Generally, you invest a certain percentage of your income and your employer may or may not match your contribution. You are provided with a list of possible investment choices that are usually made up of stocks, bonds and municipal funds.

Your investment grows when the companies that you are invested in realize a profit and your investment decreases if the companies realize a loss. In most years, and with wise investment decisions, you may realize approximately an 8% growth. The money put into these accounts is tax-deferred until you withdraw them.

There are several advantages to opting for a company sponsored retirement plan. The money contributed is both tax deductible and tax-deferred. You are able to borrow against these funds if a hardship occurs or you are paying for your kids college or purchasing new home. However, there are some disadvantages to this type of retirement planning as well. First, if you withdraw the money before you are 59 1/2 you may have to pay an additional 10% penalty on the money. Second, you must start withdrawing the money at a government mandated minimum when you reach 70 1/2.

If you have decided that you need additional retirement savings, or are not covered by your company; you can opt to set up your own retirement plan. There are a few choices here. However, most people choose either a traditional IRA or a Roth IRA account.

A traditional IRA works much the same way as a 401K. The money you put into this type of account is tax-deferred so you won’t have to pay taxes on it until you start taking it out. It also has the same penalty clause and you still are required to take the money out when you reach 70 1/2

The difference between a Roth IRA and a traditional IRA is that with a Roth you pay the taxes on the money as it goes in to the account but do not pay again when you withdraw. Also, because you have already paid your taxes, you do not have to withdraw the funds before you are ready.

With a company sponsored 401K plan, you do not have much of a choice in how your money is invested. However, with a Roth IRA you make those decisions for yourself. A financial advisor must be consulted to insure your decisions are within federal guidelines and to the do the paperwork, but you are in charge.

People do their retirement planning through a Roth IRA account often find that choosing to invest in real estate is their best option. This is for two reasons: investing in real estate is usually safer than investing in traditional financial instruments, and; the rate of income earned by these investments can be almost double that of those other investments. It is something to consider.

Having a retirement plan in place is essential to your future financial well-being. Choosing the right retirement plant and the right investment choices will insure your retirement will be all that you hope it will be.

Rich Eng

Spend Your IRA First – Maximize Your Social Security

Ask almost any financial planner if you should spend your IRA first or last and you will be told to spend your non-qualified (after tax) savings first and your qualified (IRA, 401K, 403B) funds last. Recent research has shown this is not necessarily the best way to use your retirement funds. For the sake of brevity, we will refer to the qualified plans as IRA in the rest of this article.

Most retirees will receive their retirement income from a combination of their non-qualified savings, their IRA, and from Social Security and/or a pension. Income tax must be paid on the funds coming from the IRA, Social Security, and the pension. You were already taxed on the principle of your non-qualified savings so only the dividends, capital gains, and interest will be taxable on them. The dividends and capital gains receive lower taxation than your normal tax bracket.

One reason to spend your IRA first is to use it to delay taking Social Security until age 70. This will increase your Social Security benefit by approximately 162% over taking it at age 62 and by approximately 135% over taking it at age 66.

By maximizing your Social Security benefit at age 70, you are taking advantage of a monthly income stream guaranteed by the United States Government that is adjusted for inflation. Where else can you find income of that quality in the financial markets?

Inflation has to be a concern of retirees since it can substantially erode retirement savings. By maximizing the amount of your Social Security benefit, you are minimizing your exposure to future inflation.

If you read the current financial press, many writers are predicting inflation to increase in the future. Even now with the increase in oil prices, food prices, and prices of other items, we are seeing a short term increase in inflation. If inflation continues to rise in the future, you need to have a plan to minimize its impact on your retirement. Social Security will shield that part of your income from inflation so maximize your Social Security benefit.

Another reason to spend your IRA first is to save taxes during your retirement and give you more after tax income to enjoy in your retirement.

Every dollar of your IRA is taxable when you withdraw it. You were allowed to deposit it into the IRA tax-free, but now is the time to pay Uncle Sam. The concept is that you put the funds in the IRA when you were working and in a high tax bracket so you could withdraw them in retirement when you were in a lower tax bracket.

What if taxes are increased? This will increase the tax you pay on your IRA withdrawals. Unfortunately, it appears taxes will increase during your retirement to support Social Security, Medicare, War on Terror, and other government programs.

Spending your IRA first can also lower the amount of tax you have to pay on your Social Security benefits. This will be covered in detail in another article.

In summary, spending your IRA first can increase your Social Security benefits, lower your tax exposure from potential tax increases in the future, and lower the tax you pay on your Social Security income.

PART II

Previously, we explored why it was best to spend your IRA first. The first reason was to delay taking Social Security until age 70 to maximize the inflation adjusted income from a safe source, the United States Government.

The second reason was to have the IRA withdrawals taxed under the current tax structure since it is highly probable that tax rates will rise in the future. If you delay your IRA withdrawals, they may be taxed at a higher rate.
The third reason that was not covered in detail in the previous article is to reduce the amount of money that you will have to pay on your Social Security benefit income. We will cover this reason in detail in this article.
It may come as a nasty surprise to retirees that income tax must be paid on Social Security benefits if what the Internal Revenue Service calls your “provisional income” is over a certain limit. Provisional income is figured by summing your adjusted gross income, your tax-exempt income, and one-half of your Social Security income.
The more income you receive, the larger your provisional income will be, and the more tax you will pay on your Social Security benefits
.
If you are married and your provisional annual income is over $44,000, you will be in the higher tier of provisional income and you could pay tax on up to 85% of your Social Security.

When you spend your IRA first and maximize your Social Security income, you will draw less from your IRA since more of your retirement income will come from your Social Security. This lowers your adjusted gross income which in turn lowers your provisional income. Lower provisional income lowers your taxes on Social Security. This gives you more after tax income to enjoy in your retirement.

Let’s take the case of two married couples who file jointly. They plan for $70,000 per year retirement income. For sake of simplicity, let’s assume that both couples have the same Social Security benefits at their normal retirement age and both have the same amounts in their IRA’s.

Couple #1 starts taking Social Security at age 62 and receives $30,000 annual Social Security benefits.
Couple #2 spends from their IRA’s first to delay taking Social Security. At age 70, they start receiving Social Security benefits of $48,600 per year.

At age 70, the pretax income for each couple will be:
Couple #1 $40,000 from IRA’s plus $30,000 Social Security = $70,000
Couple #2 $21,400 from IRA’s plus $48,600 Social Security = $70,000
If you want to skip the final tax calculations, skip down to the heading “Final Tax Amount” to see the tax savings from spending your IRA first.

Calculation of Provisional Income
For the calculation of provisional income we will assume that they did not receive any tax exempt interest.
Couple #1 $40,000 from IRA’s plus $30,000/2 Social Security = $55,000 provisional income.
Couple #2 $21,400 from IRA’s plus $48,600/2 Social Security = $45,700 provisional income.
As you can see, by spending their IRA funds and delaying Social Security, couple #2 lowered their provisional income by $9,300.

Calculation of Taxable Social Security Income
How much does that save in taxes? The IRS has made this calculation complicated. You can access the form for this calculation on page 25 of the Instructions for Form 1040 from the IRS website.
Since these couples will be over the upper limit ($44,000) for provisional income, the amount they will pay on Social Security income is calculated by performing two calculations and then taking the lesser of the two amounts from the calculations.
Calculation #1 = 85% of Social Security
Calculation #2 = $6,000 %2B 85% times (provisional income – $44,000)

For couple #1
The first calculation is 85% times $30,000 Social Security = $25,500.
The second calculation is $6,000 plus 85% times ($55,000 less $44,000) = $15,350.
The lesser amount from the two calculations is $15,350.

For couple #2
The first calculation is 85% times $48,600 Social Security = $41,310.
The second calculation is $6,000 plus 85% times ($45,700 less $44,000) = $7,445.
The lesser amount from the two calculations is $7,445.

Final Tax Amount
Now let’s calculate the total taxable income for both couples.
Taxable income for couple #1 will be total IRA income ($40,000) plus the taxable Social Security income ($15, 350) = $55,350.
Taxable income for couple #2 will be total IRA income ($21,400) plus the taxable Social Security income ($7,445) = $28,845.

To calculate the tax each will pay, we will use the 15% tax rate.
Couple #1 will pay $8,303 and couple #2 will pay $4,327. Couple #2 will save $3,976 in taxes over couple #1.
By spending their IRA first, couple #2 will have $3,976 more each year to spend on their retirement. Multiply this over the years in your retirement and it will take you on a few nice trips or allow you some pleasures that you would otherwise not have been able to enjoy.

In summary, spending your IRA first can increase your Social Security benefits, lower your tax exposure from potential tax increases in the future, and lower the tax you must pay on your Social Security.

Disclaimer: The information in this article is general information. If you want to leave an estate to your children or if you are in poor health, concepts presented in this article may not apply to you. Seek professional advice from your accountant or a professional adviser.

Article by John Howe

401k Retirement Plan

A 401k is a type of employer-sponsored retirement plan. It is a way for employees to save for their retirement by having a certain percentage of their paycheck withheld by their employer and deposited into the company’s plan. Employers can choose to match the employee’s contributions and thereby share the profits of the company with their employees. The plan is usually operated through an investment firm.

For example, Acme Company’s 401k plan allows employees to contribute part of their paycheck into the plan. Acme will match incrementally up to 3% of the employees contribution. If the employee contributes 3%, Acme will contribute 2% to the employee’s account. If the employee contributes 4%, the company will contribute 2.5%, and if the employee contributes 5% or more, the company will contribute 3%. The employer’s contributions are called matching contributions.

As you can see, if an employer provides matching contributions, the employee can increase the amount of money he receives from his employer above and beyond his salary. For example, if Joe makes $30,000 in 2007 and contributes 5%, Acme will contribute an additional 3%. As a result, Joe will receive $30,000 plus $900 additional money from Acme’s matching contributions. Joe’s total compensation will be $30,900, not $30,000, simply because he participates in Acme’s plan.

How does a 401k work?

Your employer withholds a certain amount of your paycheck and deposits that money, along with any matching contributions, into your 401k account. The money in the plan is invested in various financial instruments, such as mutual funds. The money stays in the account until you reach a certain age when it is legal to withdraw the money, or until you meet any of the several exceptions to the age rule. Since the money will be in the account over a period of years, this causes the account to earn money through compounding, so your account grows not only through your regular contributions made from your paycheck but also by earning interest or dividends.

How do I make contributions to a 401k?

You make a contributions through your employer. If you decide to participate in the plan, you will determine what percentage of your paycheck that you want to be deposited in your account, and your employer will withhold that amount from each paycheck you receive. The employer then deposits the withheld money into your account, along with any matching contributions, so contributions are made to your account each pay period.

Are there any limitations to making a contribution to a 401k?

Yes, there are limitations. You are limited by IRS rules and also by whatever rules your employer implements in his plan.

IRS Contribution Limitations For 2007, the limit for contributions to defined contribution plans is the lesser of:

1. 100% of the participant’s compensation, or

2. $45,000.

Employer Limitations

When your employer sets up his plan, he can place limitations on contributions. The plan can be set up so that employees can only contribute up to a certain percentage of their paychecks. A common example is the limitation on matching contributions the employer will provide.

What is a company match?

A company match is when employers agree to contribute certain amounts to your 401k in addition to your own contributions. Employers may decide to make a contribution above and beyond what you decide to contribute. This is one version of what is commonly known as profit-sharing since the company gives you additional compensation toward your retirement. Because you are part of the company and your work helps contribute to any profit the company makes, employers use matching contributions as a way to reward employees for their input to the company’s bottom line. This can also provide an incentive for employees to work harder in order for the company to make more money.

If my employer goes out of business before I retire and receive distributions from my 401k, what happens?

401k plans are covered by the Employee Retirement Income Security Act of 1974, or ERISA. Generally, if an employer goes out of business or becomes bankrupt, the employer’s creditors receive the employer’s assets to settle debts. However, ERISA protects your plan money from those creditors. The creditors generally cannot get any money from a 401k plan to settle debts of a bankrupt employer.

When can I withdraw my money from a 401k?

You can withdraw your money at any time. However, if your withdrawal is an early distribution, you will have to pay an extra tax on the withdrawal.

What is an early distribution?

An early distribution is any money taken out of your 401k before reaching age 59 1/2. Early distributions are subject to a 10% tax penalty in addition to regular income taxes, so if you withdraw $5,000 when you are 45, you will have to pay $500 as a tax penalty. However, as discussed in the following question, there are some exceptions that allow you to withdraw money before age 59 1/2 without owing the 10% penalty.

Are there any other circumstances when I can withdraw my money before age 59 1/2?

Yes, there are some exceptions to the age rule. You will not owe the 10% tax on an early withdrawal if the withdrawal is: 1. Made to a beneficiary after your death. 2. Made because the employee has a qualifying disability. 3. Made as part of a series of substantially equal periodic payments. 4. Made after separation from service if the separation occurred during or after the year when the employee reached age 55. 5. Made to an alternate payee under a qualified domestic relations order (QDRO). 6. Made to an employee for medical care. 7. Timely made to reduce excess contributions under a 401k plan. 8. Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions). 9. Timely made to reduce excess elective deferrals. 10. Made because of an IRS levy on the plan. 11. Made a qualified reservist distribution.

How do you maintain a 401k?

You maintain your account by making contributions to it. You can only make contributions through your employer. The contributions are withheld from your paycheck, and any matching contributions from your employer are deposited into the plan by your employer. If you leave the company, you can choose to leave your 401k as it is, or roll it over into a Traditional IRA.

If I quit my job where I was participating in a 401k plan, what happens?

The money you contributed to the 401k is always yours, regardless of how long you have worked for the employer. Generally, an employer requires that you work a certain number of years before you are vested, which simply means that you are legally entitled to the employer’s matching contributions. Therefore, depending on your employer’s rules, you may or may not be able to keep the employer’s matching contributions.

There are several things that you can do with your account after leaving your job. One is to leave the 401k in your employer’s plan until you decide what to do with it. You can even leave it there until you reach age 59 1/2 and can begin receiving distributions. However, your former employer may charge you fees for maintaining your 401k for you. Check the plan agreement for details about your former company’s specific rules.

Another thing you can do is rollover your 401k into a Traditional IRA. Contributions to Traditional IRA’s receive the same type of tax deferral treatment as contributions to 401k’s, so you may be able to rollover your money into a Traditional IRA and not owe additional taxes.

What if I am laid off or fired?

Your options include any of the solutions discussed in the previous question. Despite being fired or laid off, the contributions that you made to your account are still your money, so you are legally entitled to all contributions that you made. However, depending on the rules of your plan, you may not be entitled to the employer matching contributions.

Can I start a 401k if I already have an IRA?

Yes, you absolutely can participate if you also have IRA’s, Traditional or Roth.

How does a 401k affect my federal income tax?

Contributions are considered “elective deferrals” of income, so you do not pay any federal income tax on them in the year you make the contribution. For example, John contributes $1,000 to his 401k in 2007, and his employer contributes $200. John’s salary for the year is $30,000. He will pay federal income taxes on $29,000 only, which is his salary minus his $1,000 contribution.

However, Uncle Sam will never let you get away completely tax-free. When you take distributions from your plan during retirement, you will pay federal income taxes on that money then. For example, if Susan is age 65 and receives a $10,000 distribution in 2007, she will owe taxes on the $10,000. However, when she contributed to the plan years ago, she did not have to pay any taxes on the money she contributed then.

Do I have to withdraw money at a certain age?

Yes, you must start withdrawing money by April 1 of the year after: 1. You reach age 70 1/2, or 2. You retire from the company maintaining the 401k plan.7

What happens to my 401k after I die?

You may designate beneficiaries who will inherit your account after your death.8

Why participate in a 401k? Why not just invest that money in mutual funds?

By participating, you receive tax benefits that you would not receive by investing your money in mutual funds on your own. The money you contribute is not subject to income tax. Therefore, you end up paying fewer taxes by participating in the plan than if you bought mutual funds on your own. For example, Joe works for ABC Company. He makes $30,000 and contributed $1,500 to his 401k. He will owe federal income taxes on $28,500 only, not on his full salary of $30,000. He gets to deduct the contributions from his income before calculating his taxes.

Another reason to participate is that in most plans, employers match a portion of your contributions, so it is as if your employer is giving you free money simply by participating! For example, Joe of ABC Company makes $30,000 in 2007 and contributes $1,500 of that salary to his 401k plan in 2007. ABC Company provides matching contributions of $1000, so Joe really makes $31,000 in 2007, not just his $30,000 base salary.

Article by Khaty Panambo

Roth IRA Rules

Have you read about this recently? The government has set up Roth IRA rules that allow you to save and earn money for retirement that won’t be taxed when you take it out. Does it sound too good to be true? Well, it isn’t. You can really save the best for last when you set up this type of savings account.

The definition of a Roth IRA, named for U.S. Congressman, William V. Roth, Jr., is a retirement savings account in which an individual is allowed to set aside a specified amount of their income, after taxes. Earnings grow tax free and can be withdrawn, tax-free, at age 59 1/2.

Allowable Contributions

In 2008, Roth IRA rules limit allowable contributions $5000. Making maximum contributions annually, while earning just a modest 8% interest, means that you could build a substantial, tax-free nest egg.

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

Allowable contributions must come from income that your earn from a job. If the income from that job is over $101,000, your maximum contribution will be lowered, from $5000, incrementally, according to your income amount.

The definition of a Roth IRA, named for U.S. Congressman, William V. Roth, Jr., is a retirement savings account in which an individual is allowed to set aside a specified amount of their income, after taxes. Earnings grow tax free and can be withdrawn, tax-free, at age 59 1/2.

Allowable Contributions

In 2008, Roth IRA rules limit allowable contributions $5000. Making maximum contributions annually, while earning just a modest 8% interest, means that you could build a substantial, tax-free nest egg.

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

Allowable contributions must come from income that your earn from a job. If the income from that job is over $101,000, your maximum contribution will be lowered, from $5000, incrementally, according to your income amount.

If you file a joint tax return, your combined income cap is $159,000. Above that amount and, again, your allowable contributions will be lowered accordingly.

If you are at a point in your career where your income is well below the maximum cap, but you expect to meet and exceed that cap in the next few years, you would still be well advised to take advantage of a Roth IRA. The earnings from contributions made even over a short period of time could add a substantial tax free bonus to other retirement savings.

Added Incentives

And speaking of bonuses, Roth IRA rules provide some added incentives for individuals holding these accounts. For example, you can withdraw your contributions (not your earnings*), any time, tax free. This may come in handy if you find yourself in financial dire straits. Ideally, though, this money really is for retirement and shouldn’t be touched, if possible.

If you’ve had a Roth IRA for at least five years, you can also withdraw up to $10,000 ($20,000 if you’re married), tax free to purchase a home. If you’ve had your account less than five years, you can still withdraw the maximum amount for a home, but you will have to pay taxes on it. However, there is no 10% early withdrawal penalty.

Roth IRA rules also allow you dip into your savings to help pay college expenses. You are allowed to withdraw contributions tax free, but if you take out earnings, they will be taxed accordingly, without the 10% penalty ­ provided that the funds are being used for college.

Allowable Investments

You may notice that the definition of a Roth IRA doesn’t cover investing your contributions so that you can grow your earnings. However, according to Roth IRA rules, you are allowed to invest in almost anything  stocks, bonds, CD, mutual funds and even real estate.

You can set up a self directed Roth IRA that will give you decision-making authority over investments. If you don’t care to be more involved beyond making contributions, your financial institution or investment counselor will invest your money for you. In both cases, the custodian of your account will be responsible for generating reports, regulation compliance, and other applicable paperwork.

If you follow Roth IRA rules, you can get your taxes out of the way, save and earn money and never have to give Uncle Sam another dime. That’s what I call, “saving the best for last!”

Article by Nicanor Castillo

401a Retirement Plans

What is a 401(a)?

A 401(a) is a type of retirement plan available through certain employers. Contributions of money into your plan are made through your employer and the employer makes most of the decisions about how the plan is set up. Contributions can be made by the employer, you the employee, or both.

What are the advantages of a 401(a)?

The advantages of having a 401(a) plan is that it effectively increases your after tax income since contributions are deducted before your income tax is calculated. Since most employers set up a system where contributions are automatically deducted out of your paycheck, the dollar cost averaging effect takes place. Dollar cost averaging spreads the cost of the investment over a long period of time which can provide protection from fluctuations in market prices; the opposite of dollar cost averaging would be to make one huge purchase of investment assets once. Dollar cost averaging allows investors to eventually build up a large amount of investment assets by incrementally buying them over a long period of time.

Also, if you ever change employers, your contributions are your property so you do not lose any of the money deducted from your paycheck if you change jobs. You also have the option of putting any 401(a) money into a 401(k), 403(b), 457, or Traditional IRA.

401(a)’s also provide tax advantages. Any earnings on your contributions are tax-free until you begin to make withdrawals when you retire. So if your 401(a) money is invested in mutual funds, you will not owe any income tax on the dividends earned until you make a withdrawal from your 401(a). Also, if your employer offers a 457(b) plan, you can participate in both at the same time.

Do I have to meet certain requirements to participate in a 401(a)?

There are usually participation requirements set up by your employer. Common examples include being a full-time employee, having worked for the company for a certain number of months, or having completed a certain number of hours of work for the company.

How will money be deposited in my 401(a) account?

The plan can be set up with employer-only contributions or matching contributions. The employer will decide how the plan will be set up. If there are matching contributions, a fixed amount will be deducted from each of your paychecks and deposited in the 401(a). If contributions are only made by the employer, then the employer will periodically deposit money into your 401(a) account.

You should receive account statements every so often detailing the balance and activity in your 401(a) account.

When can I withdraw my money from a 401(a)?

You can withdraw your money at any time. However, if your withdrawal is an early distribution, you will have to pay an extra tax on the withdrawal.

What is an early distribution?

An early distribution is any money taken out of your 401(a) before reaching age 59 1/2. Early distributions are subject to a 10% tax, so if you withdraw $5,000 from your 401(a) when you are 45, you will have to pay $500 in taxes. However, as discussed in the following question, there are some exceptions that allow you to withdraw money before age 59 1/2 without owing the 10% penalty.

Are there any other circumstances when I can withdraw my 401(a) money before age 59 1/2?

Yes, there are some exceptions to the age rule. You will not owe the 10% tax on an early withdrawal if the withdrawal is:

1. Made to a beneficiary after your death.
2. Made because the employee has a qualifying disability.
3. Made as part of a series of substantially equal periodic payments.
4. Made after separation from service if the separation occurred during or after the year when the employee reached age 55.
5. Made to an alternate payee under a qualified domestic relations order (QDRO).
6. Made to an employee for medical care.
7. Timely made to reduce excess contributions under a 401(a) plan.
8. Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
9. Timely made to reduce excess elective deferrals.
10. Made because of an IRS levy on the plan.
11. Made a qualified reservist distribution.

Are there any limitations to making a contribution to a 401(a)?

Yes, you are limited by IRS rules and by whatever rules your employer implements in his 401(a) plan.

IRS Contribution Limitations

There are many IRS rules dictating limitations on contributions to 401(a) plans. They can get fairly complicated and involve many calculations. Check with your plan administrator or financial advisor for more detailed information, but be aware that there are limitations to the amount of money you can contribute to a 401(a) each year.

Employer Limitations

When your employer sets up his 401(a) plan, he can place limitations on contributions. The plan can be set up so that employees can only contribute up to a certain percentage of their paychecks. An employer can decide to set up his plan in a variety of ways, so be sure to get clarification and explanation of your employer’s rules.

Can I start a 401(a) if I already have an IRA?

Yes, you absolutely can participate in a 401(a) if you also have IRA’s, Traditional or Roth.

How does a 401(a) affect my federal income tax?

401(a) contributions are considered “elective deferrals” of income, so you do not pay any federal income tax on them in the year you make the contribution. For example, John’s employer contributes $1,000 to his 401(a) in 2007. John’s salary for the year is $30,000. He will pay federal income taxes on $30,000 only, which is his salary without the employer contribution included.

However, you do not get away completely tax-free. When you take distributions from your 401(a) plan during retirement, you will pay federal income taxes on that money then. For example, if Susan is age 65 and receives a $10,000 distribution from her 401(a) in 2007, she will owe taxes on the $10,000. However, when she contributed to the plan years ago, she did not have to pay any taxes on the money she contributed then.

What happens to my 401(a) after I die?

You may designate beneficiaries who will inherit your 401(a) after your death.

Why participate in a 401(a)? Why not just invest that money in mutual funds?

By participating in a 401(a), you receive tax benefits that you would not receive by investing your money in mutual funds on your own. The money contributed to your 401(a) is not subject to income tax. Therefore, you end up paying fewer taxes by participating in a 401(a) than if you bought mutual funds on your own. Another reason is that it effectively increases your compensation from your employer. If your employer makes $1000 of contributions to your 401(a) in 2007 above and beyond your base salary, you effectively get an additional $1000 in compensation for which you do not owe federal income taxes.

This article has covered common questions investors typically have when learning about 401(a) plans. This article does not cover all aspects of the 401(a), but it is designed to give you an overview of what the plan is and how it works. For additional information or specific questions, contact your plan administrator or financial advisor.

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