Economics Ms. McRoy-Mendell Retirement Plans Economics Ms. McRoy-Mendell

Aim Which retirement plan is best for you?

Myths of Retirement You have plenty of time to start saving You will spend less money when you retire You can depend on Social Security and a company pension plan to pay your basic living expenses Your pension benefits will increase to keep pace with inflation Your employer’s health insurance plan and Medicare will cover all your medical expenses

ERISA The Employee Retirement Income Security Act of 1974 (ERISA) covers two types of pension plans: defined benefit plans defined contribution plans

Defined Benefit vs. Defined Contribution Defined benefit plan: A type of pension plan in which an employer/sponsor promises a specified monthly benefit at retirement that is predetermined by a formula based on the employee's earnings history tenure of service and age rather than depending directly on individual investment returns

Defined Benefit vs. Defined Contribution Defined contribution plan: A type of pension plan where the employee or the employer (or both) contribute to the employee's individual retirement account. (e.g. 401(k)/403(b)) These contributions generally are invested on the employee's behalf. 

Fiduciary Responsibility A fiduciary: A person legally appointed and authorized to hold assets in trust for another person. Primary responsibility of fiduciaries is to run the plan solely in the interest of participants.

Employer-Sponsored Retirement Plans 401(k) Plan: a defined contribution plan sponsored by a private institution, where an employee can make contributions from his/her paycheck into a retirement account Can be “Traditional” (i.e. pre-tax) or “Roth” (i.e. post-tax)

Employer-Sponsored Retirement Plans Pros of “Traditional” accounts Employees can elect to defer a portion of their salary to a 401(k) plan. This lowers their taxable income for the year! Your employer may match these contributions. Read: FREE MONEY! Earnings/gains are tax-deferred Allows for loans/early withdrawals, in certain circumstances. Cons of “Traditional” accounts There is a dollar limit on the amount an employee may elect to defer each year. $18,000 in 2015 Required minimum distribution at age 70 ½ (unless you are working)

Employer-Sponsored Retirement Plans Pros of “Roth” accounts Since these are after-tax contributions, withdrawals are tax-free! Even your investment gains! But, you must be at least 59 ½ and have contributed to the plan for at least 5 years. Your employer may match these contributions. Read: PARTIALLY FREE MONEY! You may need to pay taxes on their contributions. Allows for loans/early withdrawals, in certain circumstances.

Employer-Sponsored Retirement Plans Cons of “Roth” accounts There is a dollar limit on the amount an employee may elect to defer each year. Max $18,000 in 2015 Contributions are not tax-deductible.

Vesting Employee contributions to a pension plan always belong to you, the employee. But, what about the contributions the employer has made? These may be subject to vesting Vesting: The right of an employee to keep the company’s contributions from company-sponsored plans even if the employee no longer works for the company

Hardship Withdrawals You can withdraw funds from a 401(k)/403(b), without penalty, if the money is used for the following “immediate and heavy” expenses Certain medical expenses Costs relating to the purchase of a primary residence Tuition and related educational fees Payments necessary to prevent eviction from, or foreclosure on, a primary Funeral expenses Certain expenses for the repair of damage to the employee's primary residence

Employer-Sponsored Retirement Plans (cont’d) 403(b) Plan: a defined contribution plan sponsored by a public or non-profit institution, where an employee can make contributions from his/her paycheck into a retirement account Also known as a tax-sheltered annuity (TSA) plan Can also be “Traditional” (i.e. pre-tax) or “Roth” (i.e. post-tax) Same pros/cons as a “Traditional” vs. “Roth” 401(k)

Personal Retirement Plans In addition to employer plans, many people have personal retirement plans. Typically in the form of an Individual Retirement Account (or IRA)

Personal Retirement Plans (cont’d) Regular or Traditional IRA Allows an individual to make annual contributions to a retirement account until the age of 70 ½ At 70 ½ minimum distribution requirements begin A person under 50 years old can contribute up to $5,000 per year Your contributions may be fully or partially tax-deductible, depending on your tax filing status and adjusted gross income (AGI)

Personal Retirement Plans (cont’d) Roth IRA Annual contributions to a Roth IRA are not tax-deductible, but the earnings are tax-free. A person under 50 years old can contribute up to $5,000 per year if he/she meets adjusted gross income requirements (AGI) You can contribute beyond the age of 70 1/2 You can withdraw money from the account without paying taxes or penalties after contributing for five years, if you are at least 59 ½ years old.

Personal Retirement Plans (cont’d) Simplified Employee Pension (SEP) Plan Also known as a SEP-IRA, An individual retirement account that is ideal for small businesses or for self-employed individuals. Each employee first sets up an IRA account at a bank or other financial institution. Then, the employer/employee makes an annual contribution of up to $53,000 (in 2015) or 25% of the employee’s compensation, whichever is lower. The employee’s contributions are fully tax-deductible and the earnings are tax-deferred.

Additional Retirement Plans What if you have funded your 401(k) and IRA’s to their limits and you want to put away more money? The answer may be an annuity. Annuity: A contract purchased from an insurance company that guarantees a future fixed/variable payment to the purchaser for a certain number of years or for life

Annuities (cont’d) Fixed Annuities: Provide a specific amount of income for the duration of the life of the agreement. Variable Annuities: Provide payments above a minimum guaranteed amount, depending on the rate of return on your investment.

Annuities (cont’d) Immediate Annuities: Provide income payments at once. They are usually purchased with a lump-sum payment. E.g. When you reach 65, you may no longer need all your life insurance coverage (esp. if your duckies are all grown up). You may decide to convert the cash value of your insurance policy into a lump-sum payment for an immediate annuity.

Annuities (cont’d) Deferred Annuities: Will provide income payments at some future date. Meanwhile, interest accumulates on the money you deposit.

Aim Which retirement plan is best for you?