1 IRAs Financial Planning for Women March 2006 Jean Lown & Tiffany Smith

2 Why YOU need an IRA Americans are poorly prepared for long retirements in a changing world Americans are poorly prepared for long retirements in a changing world Life expectancy is rising Life expectancy is rising Health care costs are escalating rapidly Health care costs are escalating rapidly Long term care costs are formidable Long term care costs are formidable Medicare is in far more trouble far sooner than SS Medicare is in far more trouble far sooner than SS Lower investment returns (J. Clements, WSJ) Lower investment returns (J. Clements, WSJ) Traditional company pensions are disappearing Traditional company pensions are disappearing

3 More Reasons for IRA DEBT!! (2004 SCF) DEBT!! (2004 SCF) Debt growing faster than wealth Debt growing faster than wealth Credit card debt up 27% in past 5 years Credit card debt up 27% in past 5 years 18% are leasing vehicles rather than buying– high mo. payments but no asset to show 18% are leasing vehicles rather than buying– high mo. payments but no asset to show Mortgage debt growing faster than home equity Mortgage debt growing faster than home equity 19% of retirees still owe mortgage (Avg. $31K) 19% of retirees still owe mortgage (Avg. $31K) More college grads with high debt More college grads with high debt Today’s retirees in much better situation Today’s retirees in much better situation

4 J. Clement’s Simple test Sum retirement plan values + investments Sum retirement plan values + investments Add: home equity you plan to free up by downsizing at retirement Add: home equity you plan to free up by downsizing at retirement Subtract: all your debts (mortgage, auto…) Subtract: all your debts (mortgage, auto…) Assume you can withdraw 5%/year Assume you can withdraw 5%/year If you have $300,000, 5% = $15,000/yr If you have $300,000, 5% = $15,000/yr Plus Social Security & any pension Plus Social Security & any pension Most Americans need to invest much more! Most Americans need to invest much more!

5 Individual Retirement Accounts Overview Overview What is an IRA? What is an IRA? Why contribute? Why contribute? Who can contribute? Who can contribute? How much can you contribute? How much can you contribute? What are tax advantages? What are tax advantages? Where to invest? Where to invest? What if I need my money before retirement? What if I need my money before retirement? Retirement Savings Credit Retirement Savings Credit

6 What is an IRA? Individual investment account (not joint) Individual investment account (not joint) For retirement For retirement A tax sheltered way to save A tax sheltered way to save

7 Why Contribute? How much do you need to live on in retirement? How much do you need to live on in retirement? Will your 401(k), 403(b) be enough? Will your 401(k), 403(b) be enough? How could saving a little bit a month possibly help? How could saving a little bit a month possibly help?

8 Power of Monthly Investments 8% for 15 years = $17,417 8% for 25 years = $47,868 8% for 35 years = $115,459 8% for 15 years = $34,834 8% for 25 years = $95,737 8% for 35 years = $230,918

9 Individual Retirement Accounts IRAs allow workers to set up personal retirement accounts invested in IRAs allow workers to set up personal retirement accounts invested in Stock and/or bond Stock and/or bond individual securities or mutual funds individual securities or mutual funds CDs (too conservative!) CDs (too conservative!) other types of investments other types of investments

10 Who Can Contribute? Any worker with earned income Any worker with earned income No age minimum No age minimum Worker’s Spouse Worker’s Spouse may contribute to a spousal IRA for non- employed spouse may contribute to a spousal IRA for non- employed spouse

11 Individual Retirement Accounts $4,000/year contribution limit out of earned income (2006) $4,000/year contribution limit out of earned income (2006) $5,000/year limit for workers age 50 and older $5,000/year limit for workers age 50 and older investment earnings are tax-sheltered until withdrawn investment earnings are tax-sheltered until withdrawn

12 IRA Contribution Limits 1 st 27 years: $2,000/year 1 st 27 years: $2,000/year 2001 tax law changes 2001 tax law changes : $3, : $3, $4, $4, and after: $5,000* 2008 and after: $5,000* Adjusted for inflation in $500 increments Adjusted for inflation in $500 increments

13 IRA Contribution Limits age : + $ : + $ : $4, : $4, and after: + $1, and after: + $1,000

14 Two Types of IRAs Traditional Traditional Tax-deductible contributions Tax-deductible contributions Non-deductible contributions Non-deductible contributions Roth (newer type) Roth (newer type) Contributions not tax-deductible Contributions not tax-deductible Withdrawals free of taxes in retirement Withdrawals free of taxes in retirement

15 Traditional Deductible IRAs Workers not covered by an employer plan may make tax-deductible contributions of up to $4,000 ($5,000 for 50 and older) per year Workers not covered by an employer plan may make tax-deductible contributions of up to $4,000 ($5,000 for 50 and older) per year Workers who are covered by an employer plan may be able to make tax- deductible contributions depending on income Workers who are covered by an employer plan may be able to make tax- deductible contributions depending on income

16 Income tax deduction = Marginal tax rate (MTR) x contribution = Marginal tax rate (MTR) x contribution What is your MTR? What is your MTR? Highest rate at which your income is taxed Highest rate at which your income is taxed 10%, 15%, 25%, 28%, 35%, 38 10%, 15%, 25%, 28%, 35%, 38

17 Find out your MTB Use tax tables Use tax tables Amount of taxable income? Amount of taxable income? Amount of tax Amount of tax To find MTB add $100 to taxable income To find MTB add $100 to taxable income Amount of tax? Amount of tax? $ difference in amount of tax = MTB $ difference in amount of tax = MTB

Tax Brackets: Single based on Taxable Income (after subtracting PE & SD) $0 to $7,55010% $0 to $7,55010% 7,551 to 30,65015% 7,551 to 30,65015% 30,651 to 74,20025% 30,651 to 74,20025% 74,201 to 154,80028% 74,201 to 154,80028% 154,801 to 336,55033% 154,801 to 336,55033% 336,551 and higher35% 336,551 and higher35%

19 Non-Deductible, After-Tax IRAs Available to workers covered by an employer plan whose incomes are too high to qualify for a deductible IRA Available to workers covered by an employer plan whose incomes are too high to qualify for a deductible IRA Contributions are not tax deductible Contributions are not tax deductible Investment earnings are tax-sheltered until withdrawn. Investment earnings are tax-sheltered until withdrawn. Rarely used since Roth IRAs introduced Rarely used since Roth IRAs introduced

20 Roth IRAs Contributions are not tax-deductible. Contributions are not tax-deductible. Investment earnings are tax-sheltered. Investment earnings are tax-sheltered. Tax-free and penalty-free withdrawals of earnings may be made after age 59 ½. Tax-free and penalty-free withdrawals of earnings may be made after age 59 ½. Thus, it is possible to never have to pay taxes on Roth IRA earnings. Thus, it is possible to never have to pay taxes on Roth IRA earnings.

21 Roth IRA Income Limits BUT cannot contribute to Roth if modified adjusted gross income (MAGI)> BUT cannot contribute to Roth if modified adjusted gross income (MAGI)> $110,000 single filer $110,000 single filer $160,00 joint filer $160,00 joint filer

22 What if I need my money early? Roth contributions can be withdrawn at anytime Roth contributions can be withdrawn at anytime May not borrow from IRA May not borrow from IRA

23 Roth IRA Withdrawals Tax-free and penalty-free withdrawals of earnings are allowed: Tax-free and penalty-free withdrawals of earnings are allowed: if you become disabled if you become disabled for buying your first home for buying your first home or for your children’s (or your own) education expenses* or for your children’s (or your own) education expenses* As long as the earnings are from funds invested for at least 5 years As long as the earnings are from funds invested for at least 5 years

24 Where to Invest? IRAs allow workers to set up personal retirement accounts invested in a wide variety of investments IRAs allow workers to set up personal retirement accounts invested in a wide variety of investments Stock/bond mutual funds Stock/bond mutual funds other types of investments other types of investments Starting from scratch or… Starting from scratch or… Complementing your employer plan? Complementing your employer plan?

25 Getting Started If no other retirement plan If no other retirement plan Choose a stock mutual fund Choose a stock mutual fund Growth potential Growth potential Broad diversification Broad diversification Invest for as little as $50/month Invest for as little as $50/month T. Rowe Price mutual funds T. Rowe Price mutual funds Allow $50 automatic Investment Plan (AIP) Allow $50 automatic Investment Plan (AIP) Automatic monthly transfer from checking to MF Automatic monthly transfer from checking to MF

26 Complementing Employer Plan Review employer options Review employer options Determine your asset allocation Determine your asset allocation What investment categories are missing? What investment categories are missing? International investments? International investments? Small cap stocks? Small cap stocks? Real estate? Real estate?

27 Distributions from Traditional IRAs Penalty-free withdrawals can begin at age 59 ½. Penalty-free withdrawals can begin at age 59 ½. Taxes are owed on these withdrawals Withdrawals must begin by age 70 ½. Taxes are owed on these withdrawals Withdrawals must begin by age 70 ½. Generally, withdrawals must be made at a rate that would exhaust the fund over your remaining life expectancy. Generally, withdrawals must be made at a rate that would exhaust the fund over your remaining life expectancy.

28 Retirement Savings Contribution Credit For low & moderate income taxpayers For low & moderate income taxpayers For retirement investing For retirement investing Tax credit of up to $0.50 for each $1.00 up to the first $2,000 you contribute to your employer's plan or to an IRA Tax credit of up to $0.50 for each $1.00 up to the first $2,000 you contribute to your employer's plan or to an IRA Maximum tax credit is $1,000 Maximum tax credit is $1,000 Expires after the 2006 tax year Expires after the 2006 tax year

29 Retirement Contribution Credit Married Couples Filing Jointly Heads of Households Single Filers Percent of Tax Credit $0–$30,000$0–$22,500$0–$15,00050% $30,000– $32,500 $22,500–$24,375 $15,000– $16,250 20% $32,500– $50,000 $24,375–$37,500 $16,250– $25,000 10% Over $50,000 Over $37,500 Over $25,000 0%

30 Choosing a Stock MF for IRA May FPW program (2005 & 2006) May FPW program (2005 & 2006) Stock Mutual Funds for Your IRA Stock Mutual Funds for Your IRA

31 Questions on IRAs?

32 Upcoming FPW April 12: Avoiding Investment Fraud April 12: Avoiding Investment Fraud May 10: The Best Mutual Funds for Your IRA May 10: The Best Mutual Funds for Your IRA Low cost stock mutual funds for as little as $50/month Low cost stock mutual funds for as little as $50/month June 12: Social Security, Sandy Hunter, SSA June 12: Social Security, Sandy Hunter, SSA

33 Women & Financial Planning Research Study is being expanded beyond baby boomer women Study is being expanded beyond baby boomer women Please fill out a survey Please fill out a survey Some survey respondents will be invited to participate in a focus group ($25 compensation) Some survey respondents will be invited to participate in a focus group ($25 compensation)

34 URS Seminars For workers within 5 years of retirement For workers within 5 years of retirement In Logan Thursday, May 18, 9 am - 4 pm In Logan Thursday, May 18, 9 am - 4 pm Personal Financial Planning Seminar Personal Financial Planning Seminar In Ogden Friday, May 12, 9 am – 4 pm In Ogden Friday, May 12, 9 am – 4 pm Register with URS: Register with URS: