1 Guide to Individual Retirement Accounts Make a secure retirement yours
2 Retirement means something different to everyone. Some dream of stopping employment completely and some want to continue working. Most, however, seek financial independence. They want to be able to choose what to do, when to do it, and for how long. For many, an Individual Retirement Account (IRA) is a good option to help make the dream a reality. What s inside Social Security may not be enough 1 A secure retirement is largely up to you 2 Plan for your longest probable retirement 3 Tax deferral helps build assets faster 4 Traditional IRAs are popular savings vehicles 5 Withdrawing from a Traditional IRA 6 The Roth IRA difference 7 Traditional or Roth IRA: Which is right for you? 8 2 Converting from a Traditional IRA to a Roth IRA 9
3 An Individual Retirement Account (IRA) is a type of account used by individuals to accumulate funds for retirement. Earnings are tax deferred until withdrawals begin. 1 Social Security may not be enough It was once believed that Social Security and employer pension plans would make up the majority of one s retirement income. But for many retirees, these two sources make up only a part of their retirement income. Social Security was originally designed to help provide financial assistance to retirees during The Great Depression and was never intended as a sole means of support. Given the questionable long-term visibility of Social Security and the fact that an increasing number of employers have replaced traditional pension plans with employee contribution plans, like 401(k)s, individuals need to take a more active role in their financial future. As a result, the majority of your retirement income may need to come from your personal savings. This brochure is designed to help you: Understand the importance of saving for retirement early Learn the difference between Traditional and Roth IRAs Determine which IRA is best for you Learn the facts about converting from a Traditional IRA to a Roth IRA 1. An additional 10% federal penalty tax may apply for withdrawals made prior to age 59½. 1
4 A secure retirement is largely up to you Some may postpone saving for retirement because of more immediate financial needs. However, your ability to increase your overall retirement savings can be substantially enhanced by putting aside money for retirement now, rather than later. Assets May Grow Faster if You Start Saving Early $150,000 $145,845 Save 120,000 90,000 $98,845 Savings method Save $2,000 annually for 10 years, then stop for the next 20 years Total amount saved $2,000 x 10 years = $20,000 Value at the end of 30 years = $145,845 60,000 Procrastinate 30,000 Savings method 10 years go by with no savings, then save $2,000 annually for the next 20 years 0 $20,000 Save $40,000 Procrastinate Total amount saved $2,000 x 20 years = $40,000 Value at the end of 30 years = $98,845 Contributions Account value at the end of 30 years This hypothetical example assumes an annual 8% rate of return and does not take into account income taxes or investment fees and expenses. This example is for illustrative purposes only and does not represent the performance of any specific investment. An investor s actual return is not likely to be consistent from year to year, and there is no guarantee that a specific rate of return will be achieved. 2
5 Plan for your longest probable retirement With the ongoing advances in medicine and technology, life expectancy rates continue to rise. This means that you can anticipate spending a significant portion of your life in retirement. Not only will you be responsible for funding a majority of your retirement, you will also need to make those assets last much longer. Research reveals that many financial professionals are typically using a life expectancy of age 90 for planning purposes, but the probability for both men and women to live longer than that is significant. For example, there is a 50% chance that at least one spouse of a healthy 65-year-old couple today will live beyond age 92, and a 25% chance that one of them will live to at least age 97. Therefore, by only planning to age 90, you run a greater risk of running out of money in retirement. When planning for retirement income, you should plan for your longest probable retirement. Without a realistic assessment of the time you may likely spend in retirement, there is a risk that you could outlive your assets. Retirement Assets Must Last Longer 2 100% 75% Probability 50% 25% There is a 50% chance of at least one spouse living to this age. There is a 25% chance of at least one spouse living to this age. 0% Age Male Female At least one spouse 2. Source: Annuity 2000 Mortality Tables. 3
6 Tax deferral helps build assets faster One key benefit of an IRA is that your savings grow tax deferred, which allows you to pay income taxes at a future date. IRAs allow deferral of taxes on contributions, earnings, or both. Over time, this can make a substantial difference in your retirement savings. To illustrate the power of tax-deferred compounding, consider this hypothetical example. If John contributes $100 a month for 30 years to an IRA with an 8% annual rate of return, his account would grow to $146,720. However, if he contributed the same amount to a taxable account, after 30 years his account would have grown to only $96,005 that s a difference of more than $50,000. Tax-Deferred Assets May Grow Faster $146,720 $94,041 A difference of more than $50,000 $58,488 $34,495 $96,005 $18,303 $66,881 $7,375 $45,005 $6,963 $16,232 $31, Years This hypothetical example illustrates the results of $100 monthly investments for 30 years in a tax-deferred account vs. the same investments taxed at 28%. Example assumes an 8% rate of return, compounded annually. These examples are hypothetical and for illustrative purposes only and do not represent the performance of an actual investment. An investor s actual return is not likely to be consistent from year to year and there is no assurance that similar returns will be achieved. Withdrawals from a tax-deferred account are subject to ordinary income taxes, and if made prior to age 59½, may be subject to a 10% federal penalty tax. 4
7 Traditional IRAs are popular savings vehicles An IRA is a tax-deferred retirement account that permits individuals to set aside money each year up to specific annual limits. Earnings are tax deferred until withdrawals begin. 3 For married couples, each spouse can contribute to their own IRA even if only one spouse has earned income. As a result, married couples can double their tax-deferred growth potential and potentially accumulate even larger retirement savings. Children with earned income can contribute to an IRA and potentially build their account over several decades. For 2014, the IRA annual contribution limit is $5,500 ($6,500 if you are age 50 or older) or 100% of your compensation, whichever is less. Non-deductible contributions for higher incomes If your income exceeds the limits for a deductible IRA, you may make nondeductible contributions after taxes, and you ll continue to benefit from tax-deferred growth opportunities. In addition, only your earnings are subject to income taxes when you make withdrawals. 3 Deductible contributions In addition to the benefits of taxdeferred compounding, contributions to a Traditional IRA may be fully or partially deductible from your income taxes. To be eligible to receive the deduction, all of the following requirements must be met. You must: Have earned income, Be younger than age 70½, and Satisfy the income requirements as shown in the chart below if you are covered by an employer-sponsored retirement plan IRA Deductibility Eligibility 4 (By Modified Adjusted Gross Income if you are covered by a retirement plan at work) 100% Deductible Up to For dual income families, each spouse is eligible to make separate contributions. Eligibility on deductible contributions is determined by tax filing status and income requirements if you are covered by a retirement plan at work. If your spouse participates in an employer-sponsored retirement plan but you do not, you may be eligible for a deductible IRA contribution, subject to the Modified Adjusted Gross Income requirements. Partial Deductibility Up to Single or Head of Household Taxpayer $60,000 $70,000 Joint Taxpayer $96,000 $116, An additional 10% federal penalty tax may apply for withdrawals made prior to age 59½. 4. Source: IRS.gov. 5
8 Withdrawing from a Traditional IRA Be aware of the rules when you withdraw from a Traditional IRA. Generally speaking, if you take a distribution from your IRA before age 59½, you ll be subject to a 10% early withdrawal penalty tax. There are a number of instances when early withdrawals do not trigger the penalty. 5 These include: Un-reimbursed medical expenses (to the extent they are deductible) Medical insurance premiums if you are unemployed Permanent disability of IRA owner Qualified college education expenses for you or a member of your family The first-time purchase of a primary residence (up to $10,000) If taken in substantially equal periodic payments for life or life expectancy Inherited IRA assets Call to active duty You must begin taking distributions by April 1 of the calendar year after you reach age 70½ (generally referred to as a Required Minimum Distribution or RMD ). Failure to take the RMD will result in a 50% penalty tax on the amount not distributed. Regardless of whether you made deductible or non-deductible contributions, when you take distributions, you will be required to pay taxes on your earnings, using your income tax rate in effect at the time of the distribution. In addition, if you made deductible contributions, that portion of your distribution will also be taxed at that time. An IRA can be used to leave a legacy. If you do not need income from your IRA during retirement, but would rather leave it to a beneficiary, consider a Roth IRA. You may be able to continue making contributions after you reach age 70½, and your beneficiary may not have to pay current income taxes on the inherited amount Certain restrictions to these exceptions may apply. You should speak with your tax advisor before requesting an early distribution. It is important to note that while the penalty tax may not apply in these instances, you will still have to pay any applicable income taxes on the distribution.
9 The Roth IRA difference A Roth IRA is an individual retirement account. Contributions are not tax deductible, and qualified distributions are income tax free. Like a Traditional IRA, contributions to a Roth IRA compound tax deferred. Investors age 50 and over can make contributions up to $6,500 a year. However, that is where the similarities end. With a Roth IRA, there are no upfront tax deductions because contributions are made with after-tax dollars. Distributions from a Roth IRA after age 59½ generally are not taxed if certain conditions are met. Annual contributions to a Roth IRA can be made for as long as you have earned income, even after age 70½. You can withdraw contributions (but not earnings or conversion amounts) at any time without incurring any penalties or taxes. You do not need to take Required Minimum Distributions (RMDs) during your lifetime. Contributions subject to income requirements You are eligible to contribute to a Roth IRA if you meet the income requirements shown in the chart to the right. If you do qualify for a Roth IRA, your maximum contribution amounts are the same as a Traditional IRA: $5,500 ($6,500 if you are 50 or older) in Roth IRA Eligibility 6 (By Modified Adjusted Gross Income) Single or Head of Household Taxpayer Joint Taxpayer Eligible $114,000 or less $181,000 or less Eligibility Phase-Out $114,000-$129,000 $181,000-$191,000 Not Eligible $129,000+ $191,000+ Flexible distributions An attractive feature of a Roth IRA is the flexibility you have when taking distributions. With a Roth IRA, you can withdraw contributions at any time for any reason, without paying taxes or incurring early withdrawal penalties. In addition, after the fifth taxable year following the first Roth IRA contribution made, your earnings can be withdrawn, tax free and penalty free, as long as you meet one of the following conditions: You are at least age 59½ You are or become permanently disabled You are the beneficiary of a Roth IRA You are buying your first home (up to $10,000) 6. Source: IRS.gov. 7
10 Traditional or Roth IRA: Which is right for you? When you change jobs or retire, you will have an important decision to make about the assets you have accumulated in your company s retirement plan. A wrong decision could trigger IRS penalties and a potentially large tax bill, both of which can seriously jeopardize your retirement assets. For many people, rolling the money directly into an IRA is the most appropriate solution. That way, 100% of your savings can continue to grow tax deferred. As you ve seen, there are significant differences between the features and benefits of a Traditional IRA and a Roth IRA. Before making your final choice, you should consult with your financial and tax professionals. They can review your individual needs to help you determine which approach may be most appropriate. The chart below outlines the differences between a Traditional IRA and a Roth IRA. How They Stack Up Traditional Deductible IRA Traditional Non-Deductible IRA Roth IRA 7 Tax-deferred earnings Tax-deductible contributions 8 Contributions taxed when withdrawn Earnings taxed when withdrawn Contributions allowed after age 70½ Withdrawals must begin after age 70½ 8 7. Earnings withdrawn from a Roth IRA are not taxed after the fifth taxable year following the first Roth IRA contribution made on your behalf, if the owner is at least 59½, dies, is disabled, or uses up to $10,000 of the earnings for a first-time purchase of a primary residence. 8. Based on filing status, income, and participation in employer-sponsored retirement plans.
11 Converting from a Traditional IRA to a Roth IRA If you are eligible to make annual contributions to a Roth IRA, you may want to consider transferring or converting an existing Traditional IRA 9 to a Roth IRA. Any deductible contributions and earnings converted from a Traditional IRA are subject to income taxes during the year of the conversion. If you convert, future earnings and distributions are not subject to income taxes, provided the requirements for a tax-free withdrawal are met. Does Converting to a Roth IRA Make Sense? You are not eligible to deduct contributions to a Traditional IRA You expect your tax bracket to rise in retirement You have more than five years before you need to access your assets You want to leave a legacy You do not have the assets to pay the income taxes due upon conversion You will be in a lower tax bracket when you retire You need the money within the next five years Yes No Before converting from a Traditional IRA to a Roth IRA, consult your tax advisor to understand the potential tax impact on your finances and estate. Any withdrawals from a converted Roth IRA prior to age 59½, or made within five years of a conversion, may be subject to a 10% early withdrawal penalty. 9. SEP and SIMPLE IRAs are also eligible for conversion, subject to certain restrictions. 9
12 This material is provided as a resource for information only. Neither New York Life Insurance Company, New York Life Investment Management LLC, their affiliates, nor their representatives provide legal, tax, or accounting advice. You are urged to consult your own legal and tax advisors for advice before implementing any plan. For more information mainstayinvestments.com or newyorklifeannuities.com MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey Not FDIC/NCUA Insured Not a Deposit May Lose Value No Bank Guarantee Not Insured by Any Government Agency NYLIM RIS RISWM41a-12/13