Personal Finance Retirement Planning – 2 Individual Plans Bill Klinger

Personal Finance Review Calculating how much income you need in retirement Calculating how much savings you will need in retirement Social Security Defined-benefit plans Defined-contribution plans

Individual Retirement Accounts (IRAs) Not provided by employer Initiative required by individual Can have both employer plan and an IRA

Traditional IRA Account you set up You contribute Bank, Brokerage, Investment firm You contribute Max $5,500, $6,500 if over 50 Contributions tax-deductible Income limits on amount deductible You determine investments Account grows tax-deferred Both income and capital gains Withdrawals can begin at age 59½ Penalty for early withdrawal Pay income tax on withdrawals Required minimum distributions starting at age 70½

Roth IRA Account you set up You contribute You determine investments Bank, Brokerage, Investment firm You contribute Max $5,500, $6,500 if over 50 Contributions NOT tax-deductible Income limits on ability to contribute You determine investments Account grows tax-deferred Both income and capital gains Withdrawals can begin at age 59½ Penalty for early withdrawal Pay NO tax on withdrawals No required minimum distributions

Tax-Advantaged Accounts 401(k) / 403(b) IRA Roth IRA Contributions are tax-deductible Yes No Investments grow tax-deferred Earliest withdrawal age 59½ Withdrawals taxed Employers contribute Often -- Employers match (free money) Min. initial contribution - typical bank (mmkt /CD) NA -- $1,000 - $3,000 $1 - $300 Max. annual contribution $18,000 $24,000 if over 50 $5,500 $6,500 if over 50 Required minimum distributions Yes age 70 ½

Which IRA is Better? IRA Roth IRA Contributions are tax-deductible Pay income tax on withdrawals (vs maybe lower capital gains) Roth IRA Pay no taxes on withdrawals Will taxes be higher in the future? Pay low rate now and no tax later No required minimum withdrawals Money can continue to accumulate Beneficiaries will have required withdrawals

Retirement Account Strategy If your employer matches your 401(k) or 403(b) Contribute as much as you need to in order to get match Free money! Then contribute to Roth IRA In early years, your tax rate is relatively low Will pay no taxes on withdrawals Contribute up to limit If still saving Contribute more to 401(k) Up to max Allocation and investments should be consistent with your strategy

Annuities Fixed annuities Variable annuities High fees Provides set annual payments for n years or until death Contribution (investment) not tax-deductible Payments are taxable Variable annuities Contribution(s) are invested Annual payments depend upon investment growth Often provide death benefit High fees Each year Surrender charge Not a good retirement investment May be good once in retirement to fix your income Do NOT do fancy annuities

In Class In groups of two Chapter 19 Financial Planning Exercises Problems 8 – 11 Psychology of Personal Finance (1)