Mr. Sullivan Building Wealth

 Students will be able to:  Understand the differences between a traditional and Roth IRA.  Explain the benefits of Individual Retirement Accounts.  Describe the benefits of Social Security.  Analyze online brokerage firms.

 Employer Sponsored Plans  401(k)Defined Contribution  Pension Defined Benefit  Individual Retirement Accounts  Traditional  Roth  Social Security

 Tax savings now or tax savings later?

 Mike is 21 years old and wants to start saving for retirement.  He decides to invest $5,000 into a traditional individual retirement account.

 All of these websites will allow you to open an Individual Retirement Account with little to no fees  Vanguard  Fidelity  Sharebuilder  Scottrade  E-Trade

 Mike has the option to buy:  Stocks  Bonds  Mutual Funds  ETF’s

 Mike decided to invest in a few low-cost ETFs

 Mike makes $35,000.  Income$35,000  Deductible IRA Cont.-$5,000  Taxable Income$30,000

 $5,000 reduced taxable income  x28% Tax Rate  $1,400 tax savings

 Mike continues to invest $5,000 until he retires at 65.

 Every year Mike takes advantage of a reduced tax bill of $1,400.

 Mike’s IRA contributions eventually grow to…

 $3,583, years)

 Mike needs to withdraw $50,000 every to pay his bills.  Because Mike did not pay taxes on this money when it was invested, he must now pay taxes on this money.  This is what is meant by TAX DEFFERED

 $50,000Withdrawn from IRA  x28%Tax Bracket  $14,000Owed in Taxes

 With a traditional IRA, you save money on your taxes in the current year.  You then pay taxes when the money is withdrawn.

 $5,500 maximum contribution every year  Cannot contribute if you make more than $61,000  Cannot withdraw until you reach the age of 59 and ½. (10% Penalty and Taxes)  Must begin withdrawing at 70 and ½.

 Kevin is 21 and decides to save for retirement.  Rather than investing in the traditional IRA, Kevin opts for a Roth IRA.  Kevin works at Kwik Trip and makes $40,000. He decides to invest $5,000 in a Roth IRA.

 $40,000 Income  $0Deduction for a Roth  $40,000Taxable Income

 Kevin contributes $5,000 every year for 44 years. When he is 65 he decides to retire.  After 44 years of investing $5k each year, Kevin’s investment grows to…

 $3,583,781

 Every year Kevin withdraws $50,000 to pay his bills in retirement.

 $50,000Withdrawn from Roth  $0Amount owed in taxes  $50,000Amount Kevin keeps

 Because Kevin received no tax benefit the year he invested in the Roth, EVERY PENNY THAT HE WITHDRAWS FROM A ROTH IRA IS TAX FREE!!!!

TRADITIONALROTH  $40,000Income  -$5,000IRA Cont  $35,000 Taxable Income  Saves money this year on his taxes.  Pays taxes when he withdraws at retirement.  $40,000Income  ($5,000)Roth Cont  $40,000Taxable Income  Does not save any money on taxes this year.  Pays NO taxes when he withdraws at retirement.

TRADITIONALROTH  Advantages  Immediate Tax Savings  Tax Deferred Growth  Disadvantages  Pay taxes at withdrawal  Must withdraw at 70 ½  Cannot invest if you make more than $61k  Advantages  Tax Free Income in Retirement  No Required Withdrawals  Disadvantages  No Immediate Tax Savings  Cannot invest if you make more than $105k

 $5,000 maximum contribution every year  Cannot contribute if you make more than $105,000  Cannot withdraw until you reach the age of 59 and ½.(10% Penalty)

 Every year, people are allowed a maximum IRA Contribution $5,500.  They may choose to put $2,500 in a Traditional IRA and $3,000 in a Roth.

 Low-paying savings and other cash accounts.  Unlikely to provide long-term growth.  Municipal Bonds -Pay a lower interest rate because they are already tax free. Makes no sense to put this in a tax-deferred account because it’s already tax free!

 The last day to invest in IRA’s for this year is April 15th…  …0f the next year!

 Trading Fees  User Friendly Website  Minimum Account Requirements  Reasons to Join  Various Products Offered

 Employer Sponsored Accounts  401(k)Defined Contribution  PensionDefined Benefit  Individual Retirement Accounts  Traditional  Roth  Social Security

 The Federal Insurance Contributions Act (FICA) tax is a United States Payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare.

 Employee’s pay 6.2% of their wages for Social Security and 1.45% for Medicare  Employer also pays 6.2% for Social Security and 1.45% to Medicare.

 If you make $100, Uncle Sam takes $6.20 to help pay Social Security and $1.45 to pay for Medicare.  Your employer also pays $6.20 to Social Security and $1.45 to Medicare.

 If you are self- employed, you must set aside 12.4% for Social Security and 2.9% for Medicare.  Total of 15.3%!

 Every generation pays into Social Security and Medicare while the previous generation receives benefits.  You will only receive 75 cents of every dollar you put in.  As an investment, you are GUARANTEED to lose 25%!

 Employer Sponsored Plan40%  IRA40%  Social Security20% 100%

 DO NOT……  Rely solely on Social Security to provide you with all your retirement needs.

 1. Retirement is a three-pronged stool. Which of the following is NOT one of those prongs?  A. IRA’s  B. Variable Annuities  C. Social Security  D. Employer Sponsored Retirement Accounts

 2. You work for a nonprofit who offers you a defined contribution plan. They have offered you a  A. Pension  B. 401(k)  C. 403(b)  D. Fixed Annuity

 3. A pension is an example of a  A. Roth IRA  B. Defined Benefit  C. Traditional IRA  D. Defined Contribution

 4. Which of the following is NOT a benefit of a 401(k)  A. Employer Match  B. Deferred Taxes  C. Tax Free Withdrawals  D. Reduced Current Tax Bill

 5. You work at UPS for $60,000 a year. After 15 years of service the pension they offer you is??? (.015 Fixed Factor) $13,500

 6. What does COLA stand for? Cost Of Living Adjustment

 Love Kube & Madison

 7. At what age do you have to take your money out of a traditional IRA.  A. 55 ½  B. 59 ½  C. 65 ½  D. 70 ½

 8. What is the penalty for early withdrawal of an IRA 10%

 9. Which type of retirement investment offers immediate tax relief?  A. Defined Benefit  B. Roth IRA  C. Pension  D. Traditional IRA

 10. What is the maximum current annual contribution to an IRA? $5,500

 11. At what age must you begin taking money out of a Roth IRA?  A. 59 ½  B. 65 ½  C. 70 ½  D. None of the Above

 12. What is the number one benefit of a Roth IRA?  A. Tax Deferred Investment  B. Matching Employer Contribution  C. Tax Free Withdrawals  D. Reduced Current Tax Liability

 13. Name one investment you should NOT put in an IRA? Check Account Money Market Account Municipal Bonds

 14. When is the last day to invest in an IRA?  A. January 1  B. April 15  C. June 30  D. December 31

 15. What does FICA stand for? Federal Insurance Contribution Act

 What percentage is taken out of your pay check to pay for Social Security and Medicare? (Assuming you are NOT self employed)  Social Security 6.2%  Medicare 1.45%