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Chap 16 – Retirement Planning

Chap 16 – Retirement Planning. Objectives: Review of need to save for retirement Understand types of plans and how they differ Defined benefit and defined contribution Tax aspects – 401(k) versus Roth IRA. Social Security.

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Chap 16 – Retirement Planning

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  1. Chap 16 – Retirement Planning Objectives: • Review of need to save for retirement • Understand types of plans and how they differ • Defined benefit and defined contribution • Tax aspects – 401(k) versus Roth IRA

  2. Social Security • Paid for by equal taxes on employer and employee, currently 7.65% for each • Social Security – 6.2% and Medicare - 1.45% • Provide base level of protection • not intended to maintain current life style • Current tax payments pay current benefits • Benefits based on years worked, past earnings and future inflation

  3. Employer-Funded Benefits • Defined Benefit Plans – fixed payment beginning at retirement • Based on formula including average salary in final period (usually last five years) times years of service times a “factor” • Example: Final average salary = $70,000, 25 years service, 1.5% factor: • Benefit = 70,000 * 25 * .015 = $26,250/ year

  4. Defined Benefits • Employer takes all investment risk – promises a fixed monthly payment • No inflation adjustment; not portable • Only defined benefit plans insured by the Government, not defined contribution plans • Employees may contribute to increase benefits

  5. Tax Issues • Tax-favored plans: defined contribution plans, 401 (k), IRA, and more • Allows investment earnings to grow untaxed until distributed; penalty if withdrawn before 59 ½.

  6. 401 (k) Plans • Type of employer-sponsored DC plan • Employer and employee contribute or just employee • Contributions not included in taxable income and not taxed until withdrawn • $12,000 maximum employee contribution • Employer may contribute up to 15% of salary

  7. Traditional IRA’s • Individual Retirement Account • May contribute up to $3,000/year • May or may not be tax deductible • Depends on income level and whether self or spouse covered by company retirement plan • May roll over assets from another retirement plan on a tax free basis.

  8. Roth IRA’s • Contributions – not tax deductible • Once money contributed, grows tax free and not taxed on withdrawal • Must have been established for five years to withdraw without penalty

  9. Under saving Demographics Stock Market Company match DB continuation? Social Security PBGC Changing attitudes Retirement Plan Concerns

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