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IRAs

IRAs. Financial Planning for Women March 2006 Jean Lown & Tiffany Smith. Why YOU need an IRA. Americans are poorly prepared for long retirements in a changing world Life expectancy is rising Health care costs are escalating rapidly Long term care costs are formidable

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IRAs

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  1. IRAs Financial Planning for Women March 2006 Jean Lown & Tiffany Smith

  2. Why YOU need an IRA • Americans are poorly prepared for long retirements in a changing world • Life expectancy is rising • Health care costs are escalating rapidly • Long term care costs are formidable • Medicare is in far more trouble far sooner than SS • Lower investment returns (J. Clements, WSJ) • Traditional company pensions are disappearing

  3. More Reasons for IRA • DEBT!! (2004 SCF) • Debt growing faster than wealth • Credit card debt up 27% in past 5 years • 18% are leasing vehicles rather than buying– high mo. payments but no asset to show • Mortgage debt growing faster than home equity • 19% of retirees still owe mortgage (Avg. $31K) • More college grads with high debt • Today’s retirees in much better situation

  4. J. Clement’s Simple test • Sum retirement plan values + investments • Add: home equity you plan to free up by downsizing at retirement • Subtract: all your debts (mortgage, auto…) • Assume you can withdraw 5%/year • If you have $300,000, 5% = $15,000/yr • Plus Social Security & any pension • Most Americans need to invest much more!

  5. Individual Retirement Accounts • Overview • What is an IRA? • Why contribute? • Who can contribute? • How much can you contribute? • What are tax advantages? • Where to invest? • What if I need my money before retirement? • Retirement Savings Credit

  6. What is an IRA? • Individual investment account (not joint) • For retirement • A tax sheltered way to save

  7. Why Contribute? • How much do you need to live on in retirement? • Will your 401(k), 403(b) be enough? • How could saving a little bit a month possibly help?

  8. $50 @ 8% for 15 years = $17,417 $50 @ 8% for 25 years = $47,868 $50 @ 8% for 35 years = $115,459 $100 @ 8% for 15 years = $34,834 $100 @ 8% for 25 years = $95,737 $100 @ 8% for 35 years = $230,918 Power of Monthly Investments

  9. Individual Retirement Accounts • IRAs allow workers to set up personal retirement accounts invested in • Stock and/or bond • individual securities or mutual funds • CDs (too conservative!) • other types of investments

  10. Who Can Contribute? • Any worker with earned income • No age minimum • Worker’s Spouse • may contribute to a spousal IRA for non-employed spouse

  11. Individual Retirement Accounts • $4,000/year contribution limit out of earned income (2006) • $5,000/year limit for workers age 50 and older • investment earnings are tax-sheltered until withdrawn

  12. IRA Contribution Limits • 1st 27 years: $2,000/year • 2001 tax law changes • 2002-2004: $3,000 • 2005-2007 $4,000 • 2008 and after: $5,000* • Adjusted for inflation in $500 increments

  13. IRA Contribution Limits age 50+ • 2002-2005: + $500 • 2005: $4,500 • 2006 and after: + $1,000

  14. Two Types of IRAs • Traditional • Tax-deductible contributions • Non-deductible contributions • Roth (newer type) • Contributions not tax-deductible • Withdrawals free of taxes in retirement

  15. Traditional Deductible IRAs • Workers not covered by an employer plan may make tax-deductible contributions of up to $4,000 ($5,000 for 50 and older) per year • Workers who are covered by an employer plan may be able to make tax-deductible contributions depending on income

  16. Income tax deduction • = Marginal tax rate (MTR) x contribution • What is your MTR? • Highest rate at which your income is taxed • 10%, 15%, 25%, 28%, 35%, 38

  17. Find out your MTB • Use tax tables • Amount of taxable income? • Amount of tax • To find MTB add $100 to taxable income • Amount of tax? • $ difference in amount of tax = MTB

  18. 2006 Tax Brackets: Singlebased on Taxable Income(after subtracting PE & SD) • $0 to $7,550 10% • 7,551 to 30,650 15% • 30,651 to 74,200 25% • 74,201 to 154,800 28% • 154,801 to 336,550 33% • 336,551 and higher 35%

  19. Non-Deductible, After-Tax IRAs • Available to workers covered by an employer plan whose incomes are too high to qualify for a deductible IRA • Contributions are not tax deductible • Investment earnings are tax-sheltered until withdrawn. • Rarely used since Roth IRAs introduced

  20. Roth IRAs • Contributions are not tax-deductible. • Investment earnings are tax-sheltered. • Tax-free and penalty-free withdrawals of earnings may be made after age 59 ½. • Thus, it is possible to never have to pay taxes on Roth IRA earnings.

  21. Roth IRA Income Limits • BUT cannot contribute to Roth if modified adjusted gross income (MAGI)> • $110,000 single filer • $160,00 joint filer

  22. What if I need my money early? • Roth contributions can be withdrawn at anytime • May not borrow from IRA

  23. Roth IRA Withdrawals • Tax-free and penalty-free withdrawals of earnings are allowed: • if you become disabled • for buying your first home • or for your children’s (or your own) education expenses* • As long as the earnings are from funds invested for at least 5 years

  24. Where to Invest? • IRAs allow workers to set up personal retirement accounts invested in a wide variety of investments • Stock/bond mutual funds • other types of investments • Starting from scratch or… • Complementing your employer plan?

  25. Getting Started • If no other retirement plan • Choose a stock mutual fund • Growth potential • Broad diversification • Invest for as little as $50/month • T. Rowe Price mutual funds • Allow $50 automatic Investment Plan (AIP) • Automatic monthly transfer from checking to MF

  26. Complementing Employer Plan • Review employer options • Determine your asset allocation • What investment categories are missing? • International investments? • Small cap stocks? • Real estate?

  27. Distributions from Traditional IRAs • Penalty-free withdrawals can begin at age 59 ½. • Taxes are owed on these withdrawals Withdrawals must begin by age 70 ½. • Generally, withdrawals must be made at a rate that would exhaust the fund over your remaining life expectancy.

  28. Retirement Savings Contribution Credit • For low & moderate income taxpayers • For retirement investing • Tax credit of up to $0.50 for each $1.00 up to the first $2,000 you contribute to your employer's plan or to an IRA • Maximum tax credit is $1,000 • Expires after the 2006 tax year

  29. Retirement Contribution Credit

  30. Choosing a Stock MF for IRA • May FPW program (2005 & 2006) • Stock Mutual Funds for Your IRA

  31. Questions on IRAs?

  32. Upcoming FPW • April 12: Avoiding Investment Fraud • May 10: The Best Mutual Funds for Your IRA • Low cost stock mutual funds for as little as $50/month • June 12: Social Security, Sandy Hunter, SSA

  33. Women & Financial Planning Research • Study is being expanded beyond baby boomer women • Please fill out a survey • Some survey respondents will be invited to participate in a focus group ($25 compensation)

  34. URS Seminars • For workers within 5 years of retirement • In Logan Thursday, May 18, 9 am - 4 pm • Personal Financial Planning Seminar • In Ogden Friday, May 12, 9 am – 4 pm • Register with URS: www.urs.org • 800-753-7750

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