Saving for Retirement is Complicated (or is it?) Good day! Thanks for joining us. We would like to spend a little time talking about a very important subject. Many people look at the topic of retirement planning and immediately feel overwhelmed. I hope that our discussion this morning will provide you with some insights that will take much of the mystery away from saving for retirement. Our discussion is going to focus on how a tool called the Roth IRA might fit into your plan. In order to do that, we are going to discuss two other tools that people use to save for retirement and compare them to the Roth IRA. Saving for Retirement is Complicated (or is it?) Why a Roth IRA may be a good choice for you!

Please Note This material is not intended to be used to avoid tax penalties, and was prepared to support the matter addressed in this presentation. The taxpayer should seek advice from an independent tax advisor. The discussion highlights key issues of the Internal Revenue Code and regulations. The information is provided for your education only and is not intended to be legal or tax advice. Consult your own independent tax and legal advisors regarding your individual situation. But first, please be aware that we are not in the business of providing tax advice or guidance. If you have any questions about your individual tax situation, you should consult with your tax and legal advisors.

Start with the basic questions Retirement Planning 101 Why do I need to have my own retirement savings account? It is always good to start at the beginning. And the first question many people have about this topic is: Why should I have a personal retirement account? I already have a pension plan and I participate in Social Security. Isn’t that enough? This is a valid question. And it needs to be addressed before we move on to discuss the tools that you can use to save. In order to answer this question …

Three questions point to the answers What percentage of your final expected annual salary would you like to have available for retirement income? How much of your final expected salary will your state retirement benefit replace? How much of your final expected salary will Social Security replace? I would like to pose three additional questions that will help point us to the answer we need. While I am talking about these three questions in general, please consider each of them from your personal perspective. Each of you will have different answers but I think they will lead us to the same conclusion. Question number 1: How much in retirement income would you like to have available for you to spend? Think of it terms of your last paycheck or your last annual salary. What percentage of that would you like to have in retirement?

How much retirement income would you like to have? What percentage of your final expected annual salary would you like to have available for retirement income? 100% ? 90% ? 80% ? Will you need to have an amount equal to your last check? Or will some of your expenses decrease and result in your need being only 90% or 80%? Over the years, many financial advisors have suggested that 80% of final income is a good target. More recently, the target has been broadened and 80% to 100% is commonly suggested. That this is a very personal goal and the answer will differ from person to person. For the sake of this discussion, we are going to assume that you would like to have 100% of your final income as your starting retirement income.

How large will your retirement benefit be? How much of your final expected salary will your state retirement benefit replace? Once you have decided how much you need or want as retirement income, the next two steps are to determine how much you think you will receive. So Question 2 is: How much will you receive as your benefit from your state pension plan? You might not have that information at your fingertips but it is something that is worth researching. Many people overestimate this number. Of course, the answer will vary with the age at which benefits are taken and how many years of service you have but you should be able to make a good estimate.

How large will your retirement benefit be? How much of your final expected salary will your state retirement benefit replace? 45% ? 55% ? 65% ? People sometimes think they will receive 80 or 90 or even 100% of their income as their retirement benefit. While there are a few plans that pay out at those levels, most are in the range of 45% to 65%. We are going to assume that your benefit will be 45% of your final salary.

How much will Social Security provide? How much of your final expected salary will Social Security replace? http://www.ssa.gov/myaccount Finally, Question 3 is how much will your Social Security payment be? Did you know that the current maximum payment is about $30,000 per year? Remember, that is the maximum. The more typical benefit is probably in the range of $15,000 to 20,000 per year. All of us have access to a current statement of our benefits by going to the link shown on this slide and opening our own personal account. This current statement will include an estimate of your benefits.

How much will Social Security provide? How much of your final expected salary will Social Security replace? 20% ? 25% ? 30% ? Of course, how large your Social Security payment is will vary based on a number of things but, for today, let’s assume it will be 25% of your final salary.

How much additional income will you need? Here is an example: % of Final Salary Dollars Desired income 100% $60,000 State retirement benefit -45% $27,000 Social Security -25% $15,000 Annual amount required 30% $18,000 If we assume that your final salary will be $60,000, an example would look like this. We have decided that you want 100% of your final income. Therefore, you desire your retirement income to be $60,000. We also assumed that your pension benefit will be 45% of your final income, about $27,000 and Social Security will be 25% or $15,000. That leaves 30% of the income you desire that must come from another source. And where is that? From your personal retirement savings account.

Start with the basic questions Retirement Planning 101 Why do I need to have my own retirement savings account? So back to the question we started with – The answer is pretty simple. You need to have your own account in order to cover the shortfall between your pension plus Social Security and the amount you want or need. Let’s stop here and see if there are any questions.

What was your answer? Q: Why should you have your own retirement savings account? A: Because the combination of your retirement benefit and Social Security will probably not provide the level of income you desire. The answer is pretty simple. You need to have your own account in order to cover the shortfall between your pension plus Social Security and the amount you want or need. Let’s stop here for a moment and see if there are any questions.

OK, but where should I put my savings?

NOTE: IRA – an Individual Retirement Account Two possible choices Roth IRA Or 403(b) NOTE: IRA – an Individual Retirement Account Well, if you are going to save for retirement, how should you go about it? I am going to give an overview of two popular options. We will discuss and compare them in the interest of helping you understand the choices you have.

Seven things to consider Will I pay federal income taxes now on the amount I contribute? Will I pay federal income taxes on withdrawals? Who chooses the investment product I can use? Can I keep my account even if I change jobs? Is my ability to withdraw money limited? How much am I allowed to contribute? How do I make my contribution? We will talk about each of these seven questions and discuss the answer to each question in regards to our two choices: Roth IRAs and 403(b) plans. So let’s get started.

Will I pay federal income taxes now on the amount I contribute? Roth IRA YES 403(b) NO, contributions are deducted from paycheck before taxes The first question has to do with how the contributions you make to your account are taxed. You can see that with a Roth IRA you pay taxes and then make contribution. With a 403(b),your contribution reduces your taxable income thereby lowering your current taxes. And everyone wants to pay less in taxes, right? So at first glance it appears that a 403(b) plan should be your first choice. But there is more to the story!

Will I pay federal income taxes on withdrawals? Roth IRA Not on contributions. See footnote regarding when your investment earnings will be taxed or not taxed. * 403(b) YES – you will pay taxes on both the amounts contributed and the increase in value from investment returns What happens when you are ready to take the money from your account at retirement? Now we see a different story. If you have a Roth IRA, you can take your money with paying any further taxes. It is important to note that this will apply to both the contributions you made (you have already paid taxes on those dollars) and the investment earnings in your account. This is one of the few cases where earnings are completely tax free. On the other hand, for a 403(b) account, you will pay taxes on the total amount as you withdraw it. *Note: Roth withdrawals Are always tax free on the amount contributed Are tax free on investment earnings at the later of age 59 ½ or the account’s 5th anniversary Death or disability can also result in tax free withdrawals if account is 5 years old

A comparison Roth IRA 403(b) Contributions After Tax Before Tax Withdrawals Can Be Tax Free* Taxable for contributions and earnings *Note: Roth withdrawals Are always tax free on the amount contributed Are tax free on investment earnings at the later of age 59 ½ or the account’s 5th anniversary Death or disability can also result in tax free withdrawals if account is 5 years old So, it is important to think of both sides of the coin as you consider which program might be best for you. Taking a look at this summary, consider whether paying taxes on contributions or paying taxes on withdrawals the best choice?

Pay income taxes now or later? Roth IRA 403(b) Contributions After Tax Before Tax Withdrawals Can Be Tax Free* Taxable for contributions and earnings The answer to that question depends on how you feel about this: Will your retirement income be in a higher tax bracket than your current bracket? Do you want to pay income taxes now or later? Consider the two questions on the slide. If you are younger and you expect your income to grow over time, you might not ever be in a tax bracket this low again. In that case, paying taxes now and contributing to a Roth IRA makes a lot of sense. The same could be true if you believe that tax rates will be higher after you retire. On the other hand, if you are already in a relatively high bracket, it makes sense to consider deferring taxes. One other thing, keep in mind that the Roth IRA allows you to have investment earnings and never pay taxes on those earnings. This is a real advantage of the Roth IRA. *Note: Roth withdrawals Are always tax free on the amount contributed Are tax free on investment earnings at the later of age 59 ½ or the account’s 5th anniversary Death or disability can also result in tax free withdrawals if account is 5 years old

Who chooses the investment product I can use? Roth IRA You 403(b) Your employer chooses which investments are available in your plan Let’s take a look at look at several other features of these plans. With a Roth IRA you choose which investment to use for your retirement savings. With a 403(b), your employer chooses the investments to be available under the plan. Some employers provide multiple options, some only one.

Can I keep contributing to my account even if I change jobs? Roth IRA YES 403(b) Maybe YES, Maybe NO In today’s world, many people change jobs every year. What happens to your retirement savings account if your change employers? With a Roth IRA the answer is that your account stays with you and you can continue to contribute as you see fit. A 403(b) plan is different. First, only certain employers are permitted to have 403(b) plans and those that are permitted are not required to do so. It is possible that your new employer won’t have a 403(b) plan. Second, every 403(b) plan is governed by a plan document. The plan document outlines what happens to accounts for those no longer employed with that organization. Some plans restrict the movement of money from these accounts. And even if your new employer has a 403(b) plan, the plan may not allow you to move money from your former employer’s 403(b) plan to the new plan. In either case, you would no longer be permitted to contribute to your 403(b) plan. Your account balance would stay in place but you would not be able to add to it.

Taxable for contributions and earnings Roth IRA 403(b) Contributions After Tax Before Tax Withdrawals Can Be Tax Free* Taxable for contributions and earnings Who chooses investments available? You Your employer and you What happens if you change jobs? No impact Depends on your former employer’s and new employer’s status and plan This is what our comparison looks like now after consider four variables. We have discussed whether you pay taxes on contributions or withdrawals and pointed out that the Roth IRA has the advantage of never paying taxes on the investment earnings. We discussed who chooses the investments that are available and what happens to your account if you changes jobs. Now let’s take a look at three additional features of these plans. *Note: Roth withdrawals Are always tax free on the amount contributed Are tax free on investment earnings at the later of age 59 ½ or the account’s 5th anniversary Death or disability can also result in tax free withdrawals if account is 5 years old

Is my ability to withdraw money limited? Roth IRA Not for contributions. Withdrawing earnings before the later of age 59 ½ or the account is five years old could result in taxation and penalty. 403(b) YES, for both contributions and earnings, until age 59 ½ Retirement savings account are intended for long term savings. The rules dealing with them are constructed to encourage leaving the money in the account until retirement. Therefore, there are restrictions that apply to early withdrawals. The restrictions differ from plan to plan and we don’t have time to go into the details here. But the Roth does has one important exception to the withdrawal restrictions.

The Roth IRA has a very special benefit If you are a first time home buyer AND If your Roth IRA is over five years old Then an individual can withdraw up to $10,000 tax and penalty free includes both contributions and earnings per individual, so a couple with two accounts could withdraw up to $20,000 For younger savers, this is an important benefit. The long term purpose of a retirement savings account is to provide an income base in retirement. But purchasing a new home is always a challenge, especially the first new home you purchase. The Roth IRA recognizes this challenge and allows for withdrawing up to $10,000 if you meet the two requirements. And note that a couple could withdraw up to $20,000 if each of them has a Roth IRA. Note that any earnings withdrawn are tax free.

How much am I allowed to contribute? *NOTE: “catch up provisions” allow older savers to contribute additional amounts. Roth IRA $5,500 (for 2013)* 403(b) $17,500 (for 2013)* Do these accounts have any limitations on how much you can save each year? There are restrictions and each year the IRS reviews and updates the contribution limits. The limits shown on the slide are for 2013. The limits are shown in annual amounts. If you want to think of them in monthly terms, Roth IRA limits are about $458 a month and the 403(b) limits are $1458 per month. It is obvious that a 403(b) plan allows you to save a lot more each year. But keep in mind that you can have a 403(b) plus a Roth IRA. We will talk more about this later.

How do I make my contribution? Roth IRA Direct payment or, if employer allows, payroll deduction 403(b) Before taxes directly from your paycheck One of the keys to saving for retirement is doing it consistently in a disciplined fashion. And the more convenient it is to make contributions, the more likely it is that you will keep making those contributions over a long period of time. A 403(b) plan is always convenient since contributions must be deducted direct from your paycheck. But most companies can accept Roth IRA contributions using automatic deductions from your bank account and some employers may allow for payroll deduction of Roth IRA contributions.

Are withdrawals limited? Contributions Earnings Roth IRA 403(b) Are withdrawals limited? Contributions Earnings No Withdrawing earnings before the later of age 59 ½ or the account is five years old could result in taxation and penalty1 Yes 2 Yes 2 How much can I contribute? (2013) $5,5003 $17,500 3 How do I make my contributions? Direct, may be other options Before taxes directly from your paycheck Here is how the last three features compare with each other. Note that there are a few footnotes. Age 59 ½ is important for both Roth and 403(b)s but it has a different impact on each type of plan. For a Roth, your account must be 5 years old even if you are 59 ½ in order for earnings to be withdrawn without taxation. Remember, for a Roth, your contributions are made after tax so withdrawing those contributions does not result in taxation. For a 403(b), withdrawals are restricted before age 59 ½ and withdrawals are allowed after that age without penalties. Earlier withdrawals may be permitted for death, disability or a change of job. Remember, withdrawals from a 403(b) are taxable. Also note that for both Roth IRAs and for 403(b) plans, the contribution limit may be increased for older savers. This increased contribution limit or catch up provision is greater for 403(b) plans. 1 Note: Roth withdrawals Are always tax free on the amount contributed Earnings can be withdrawn tax free at the later of age 59 ½ or the account’s 5th anniversary. In addition, at death or when disabled if account is five years old. 2 Access to both earnings and contributions is limited until after 59 ½. Earlier 403(b) withdrawals may be permitted for disability or separation from service. 3 Catch up provisions may apply and can allow older savers to contribute additional amounts.

Putting all the pieces together! So now let’s take a look at all seven of the features we discussed. Putting them on one chart can be a little confusing but building the comparison one step at time should help make it easier to review.

Review and Compare Roth IRA 403(b) Contributions After Tax Before Tax Withdrawals See footnote 1 below Taxable for contributions & earnings Who chooses investments available? You Your employer and you What happens if you change jobs? No impact Depends on your employer’s plan Are withdrawals limited? Earnings See footnote 2 below How much can I contribute? (2013) $5,500 3 $17,500 3 How do I make my contributions? Direct, may be other options Before taxes directly from your paycheck This left hand column includes all seven of the features we discussed and compares each feature for Roth IRAs, and 403(b) plans. The question most of you are probably asking yourself is this …. 1 Note: Roth withdrawals Are always tax free on the amount contributed Earnings can be withdrawn tax free at the later of age 59 ½ or the account’s 5th anniversary. In addition, at death or when disabled if account is five years old. 2 Access to both earnings and contributions is limited until after 59 ½. Earlier 403(b) withdrawals may be permitted for disability or separation from service. 3 Catch up provisions may apply and can allow older savers to contribute additional amounts.

Your situation is the key, but there are some general guidelines How do I decide? Roth IRA? 403(b)? Which to choose? Your situation is the key, but there are some general guidelines How do I decide which one is right for me? Please keep in mind that your personal goals, age, income and other factors need to be considered in answering that question. But there are a few general guidelines to consider.

Roth IRAs A great tool for younger savers In lower tax brackets, save after taxes and pay no taxes when you retire Can keep contributing even if change in employers Contributions always available for withdrawal tax free and provide an emergency fund Roth IRAs can be a great tool for younger savers to use. Assuming such a person is in a relatively low tax bracket, it makes sense to pay taxes now and pay no taxes later when the tax rate will probably be higher. Also, younger people are more likely to change jobs and Roth IRAs allow savings to continue no matter who the employer is. Finally, while the goal should be to let the account grow until retirement, the contributions can be withdrawn tax free any time and can serve as an emergency fund.

403(b) Plans Can be an advantage Save with before tax dollars Advantage as you move to higher tax brackets Higher contribution limits allow more dollars saved Advantage to savers in their peak earnings years Advantage to two income households On the other hand, if you are already in a relatively high tax bracket, saving with before tax dollars can be an advantage. Remember, if you are paying 20% in taxes and you earn $1.00, you can save only $.80 after taxes but you can save the entire $1.00 on a before tax basis. Therefore, saving in a 403(b) plan might allow you to increase the amount you are contributing to the plan. Also, if you are at an income level where you wish to set aside larger amounts, the 403(b)’s higher contribution limits are a definite advantage.

What about a combination of both? Use a Roth IRA to provide tax free source of retirement funds Use a 403(b) plan to increase the amount you can contribute and increase your retirement assets Depending on your circumstances, you might fund a Roth first and then a 403(b) OR fund a 403(b) first and then a Roth. But why not consider doing both? Why not start a Roth account and, once you are saving the full amount allowed in that account, begin a 403(b) so that you can continue to increase your savings and take advantage of both options. Or, if it fits your situation better, start funding a 403(b) now and add a Roth later.

START NOW! Whichever plan you choose, don’t delay. Start to pay yourself right now! Whichever type of account you use, don’t delay. The most important thing to do when it comes to retirement savings is this … start now. Don’t delay.

Thank You!