Financial Algebra 4 April 2018

announcements This week is PERT testing (Wednesday/Thursday) and continuing makeups Thankfully, no one in here is on the list Please remember: the first quiz of the quarter is due by April 5th Regrades have not been completed/input into the system yet

Some of the Vocabulary for this section 401(k)/403(a) plans Annuity Annuity/fixed annuity Individual retirement account (IRA) Traditional IRA Roth IRA SEP-IRA Pension plan Vesting

Individual Retirement Accounts (IRAs) Individual retirement accounts (IRAs): This is a type of savings account created by the government to encourage people to save for retirement The government offers certain tax benefits that allow investors of an IRA to reduce their income taxes The catch: They also put limits on when you can use IRA funds to make sure people only use them for retirement All IRAs can include a range of different types of investments There are two major types of IRAs and each has a specific tax benefit: Traditional IRAs Roth IRAs

Traditional IRAs Traditional IRAs: These are IRAs that allow people to make tax deductible contributions, and all earnings are tax deferred Tax deductible: A reduction of income that is able to be taxed. This money is being taken out of your regular paycheck  so it’s a temporary “loss” to you Tax deferred: The account’s earnings, such as from interest, are not taxed until they are withdrawn after retirement This feature allows you to reduce your income taxes for the year you made the contribution (you owe the government less money for the year) A tax-deferred account grows in value more quickly than one earning the same rate but in which earnings are taxed When you do withdraw money, it may be at a lower tax rate because you will be retired

Traditional IRAs The tax-deferred benefit of traditional IRAs is available to everyone Certain higher-income individuals are not allowed to deduct contributions from their taxes There are limits on how much a person can contribute to any IRA This is based on age Under 50: $5,500 Over 50: $6,500 You cannot contribute more than you’ve made in a year

Roth IRAs Roth IRAs: These are IRAs whose contributions are not tax deductible, but the earnings from an eligible account are never taxed, even after withdrawal Contribution limits are the same as traditional IRAs Roth IRAs have their own rules for how the money is distributed at retirement Eligibility to contribute to a Roth IRA phases out at high levels of income Based on the amount of money you make, you can or cannot have a Roth IRA The IRS actually has a formula for you to calculate the contribution limit But “backdoor” options are available …I didn’t look for the “backdoor” options because you won’t be tested on those

Employer sponsored retirement plans I won’t be going over those today, but there are four: Pension plans Vesting 401(k) 403(b) I will go over these next class