LearnVest Classes Retirement Challenge. Retirement Basics: Which Type of Account Might Be Right for You?

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1 LearnVest Classes Retirement Challenge Retirement Basics: Which Type of Account ight Be Right for You?

2 Resources The Power of Compound Growth Compound growth is what you earn over time on both your principal and the interest on your principal. This means that the earlier you start, the more time your money has to grow. $16,000 Compound Growth on an Investment Earning 7% Per Year $8,000 $1,000 Original Investment Year 1 Year 10 Year 20 Year 30 Year 40 *For illustrative purposes only assumes a hypothetical 7% rate of return Retirement Account Considerations Some of these accounts have restrictions or limitations that you need to meet before you can contribute to them. For most retirement accounts, you can t simply stash away as much money as you want. That means you might have to use more than one type of account to meet your savings goals. What type of investment options will you have access to? Low-cost index funds? Target-date funds? Tax Benefit This is one of the biggest deciding factors for a lot of people. For some accounts, you pay tax on the dollars you contribute now, and for others you pay tax on what you withdraw in retirement. These include age restrictions for when you can take the money out of your account and penalties you ll have to pay for withdrawing money too early. 1

3 Traditional 401(k) A retirement savings plan that is sponsored by your employer to which you contribute pre-tax dollars. In order to participate in a 401(k), your employer must offer one. If they do, they may also offer a matching contribution on your behalf although they may have a vesting policy that prohibits you from having full access to the match, which means you would not be able to access the money until after you ve worked for the company for a minimum number of years. The contribution limits in 2014 are as follows: age 50: $17,500. Age 50 and older: $23,000 (includes a $5,500 catch-up contribution) The contribution limits can change from year to year, so check irs.gov for the latest information. Investment options would depend on what your plan provider offers, but could include index funds and target date funds. Consider researching a fund s rating and its fees before you invest in one. Tax Benefits 401(k) contributions come out of your paycheck before taxes, reducing your taxable income (and thus, the amount of taxes you pay) in the year your contributions are made. Your earnings grow tax-deferred, which means you pay taxes on your withdrawals. You cannot withdraw funds without penalty until after age 59½. If you take out money earlier, your withdrawals will be subject to a 10% penalty, plus taxes. Exceptions: Hardship withdrawals allow for early withdrawal without penalties for severe emergencies like disability, major medical expenses, or job loss at age 55 or older. Required inimum Distribution (RD): 401(k)s are subject to the RD, which is a portion of your account you must start withdrawing each year after you retire or at age 70½, whichever is later. 401(k) Loans Another way to access money from your 401(k) is by taking out a 401(k) loan. Essentially, you are borrowing the money from yourself, but you can only take out the lesser of $50,000 or half of your vested account value and it must be paid back within five years. Remember that the money you take out is potentially losing out on investment growth. And if you leave your company after you ve borrowed, you may need to pay back the loan all at once. 2

4 Roth 401(k) Similar to a Traditional 401(k), a Roth 401(k) is a retirement savings plan that is sponsored by your employer, except you contribute post-tax dollars. Same as a Traditional 401(k) Same as a Traditional 401(k) Same as a Traditional 401(k) Tax Benefits Your contributions to a Roth 401(k) are made after taxes, which means you receive no tax deductions on your contributions. However, your withdrawals after age 59½ are tax free! If your employer offers both a Traditional and a Roth 401(k), then you may be able to split your contributions between the two types of accounts. Withdrawals after age 59½ are tax free. Early withdrawals are subject to a 10% penalty unless you qualify for a hardship withdrawal. Traditional IRA A type of individual retirement account to which you contribute pre-tax dollars. In order to contribute to an IRA, you have to have earned income. If you don t have earned income, you can open a spousal IRA if your spouse has earned income. The contribution limits in 2014 are as follows: age 50: $5,500 Age 50 and older: $6,500 (includes a $1,000 catch-up contribution) Whether you can make the full contribution, and receive the tax deduction for it, however, depends on a number of factors. If you don t have a retirement plan offered to you at work, you can deduct up to the full contribution limit. If you do have access to a retirement plan at work, then whether your can make full, partial or no contributions depends on your income and filing status. It s important to check irs.gov for the latest information. Investment options could include cash, stocks, bonds, mutual funds, index funds, exchangetraded funds, target date funds and more. Consider researching a fund s rating and its fees before you invest in one. 3

5 Tax Benefits Your Traditional IRA contributions are tax deductible, which means they could help reduce your tax bill in the year you make the contributions. Investments inside of your Traditional IRA also grow tax-deferred, which means you pay taxes on them when you withdraw. If you don t meet the requirements that allow you to deduct your Traditional IRA contributions, you can still make contributions, but the deductions won t be tax-deductible. Use IRS Form 8606 to keep track of these nondeductible contributions. Withdrawals from a traditional IRA after age 59½ are subject to income tax. If you withdraw earlier than that, you will be subject to income tax, plus an additional 10% penalty and a state penalty, where applicable. Required inimum Distribution (RD): Traditional IRAs are subject to the RD, which is a portion of your account you must start withdrawing each year after you retire or at age 70½, regardless of whether or not you re employed. Roth IRA Similar to a Traditional IRA, a Roth IRA is a type of individual retirement account, except you contribute post-tax dollars. As with a Traditional IRA, you, or your spouse, has to have earned income. However, if you exceed IRS-specified income limits, based on your tax filing status, you can t contribute to a Roth IRA. You should check irs.gov for the latest rules. The contribution limits are the same as a Traditional IRA. The investment options are the same as a Traditional IRA. Tax Benefits A Roth IRA is funded with post-tax dollars, just like the Roth 401(k). When you withdraw your money after age 59½, those withdrawals are tax-free. Withdrawals from a Roth IRA are tax-free, because you paid taxes on your contributions. However, if you withdraw early, you may be taxed on your earnings but withdrawals of your principal may be available tax and penalty free. Plus, the Roth IRA is not subject to the RD. 4

6 Taxable Brokerage Account A type of investment account that you can open directly with a brokerage firm. eligibility requirements. contribution limits. Compared with other retirement accounts, taxable brokerage accounts may offer you the most flexibility with investment options, which may include stocks, bonds, mutual funds, index funds, exchange-traded funds and more. Tax Benefits Taxable brokerage accounts are funded with post-tax dollars, and you may be subject to capital gains tax when you sell an investment at a gain. There are no penalties on withdrawals, although the brokerage house you choose may require a minimum amount to begin investing with. 5

7 Exercises Choosing an Account: Considerations If your tax-filing status is single DO YOU HAVE A 401(k)? Yes How much is your income?* Does your employer match your contribution? Yes How much is your income?* How much is your income?* Contribute to a Roth IRA. + Once you reach the maximum contribution, open a taxable Contribute to a deductible IRA. Once you reach the maximum contribution, open a taxable brokerage account. Yes Yes Yes Yes Contribute to a Roth IRA+until you ve maxed it out, and put the rest in your 401(k). Great! ax out your 401(k) and a Roth IRA;** then opena taxable Contribute to a Roth IRA+until you ve maxed it out, and put the rest in your 401(k). Great! ax out your 401(k) and a Roth IRA;** then opena taxable Great! ax out your 401(k ) and a nondeductible IRA; then open a taxable Contribute enough to get the full match and put the rest of your retirement contributionsin a Roth IRA.+ If you can afford to contribute more than the match plus $5,500, put the extra into the 401(k) until it s maxed out. Great! ax out your 401(k) and a Roth IRA;** then open a taxable brokerag account. Great! ax out your 401(k) and a nondeductible IRA; then open a taxable *By income, we mean your modified adjusted gross income. This convoluted name reflects the convoluted way in which it is calculated. First you subtract various items, such as education expenses or IRA contributions, from your income to determine your adjusted gross income (which is used for tax purposes). Then you add back in other items, such as student-loan deductions and foreign income, to get your modified adjusted gross income. +The rules for eligibility and contribution limits for a Roth IRA change every year. In 2014, if your modified adjusted gross income was less than $114,000, you could contribute the maximum amount, which was $5,500 (or $6,500 if you were fifty or older). If your modified adjusted gross income was between $114,000 and, you were eligible to make a partial contribution. **$23,000 is the combined 401(k) and IRA contribution limit, $17,500 and $5,500 respectively (in 2014). 6

8 If your tax-filing status is arried Filing Jointly DO YOU HAVE A 401(k)? Yes How much is your household income?* Does your employer match your contribution? Yes Contribute to a Roth IRA. + Once you reach the maximum contribution, open a taxable Does your spouse have a 401(k)? Yes How much is your household income?* How much is your household income?* Contribute to a deductible IRA. Once you reach the maximum contribution, open a taxable brokerage account. Contribute to a deductible IRA. Once you reach the maximum contribution, open a taxable brokerage account. Yes Yes Yes Yes Contribute to a Roth IRA+until you ve maxed it out, and put the rest in your 401(k). Great! ax out your 401(k) and a Roth IRA;** then opena taxable Contribute to a Roth IRA+until you ve maxed it out, and put the rest in your 401(k). Great! ax out your 401(k) and a Roth IRA;** then opena taxable ax out your 401(k)and put any extra you have in a nondeductible IRA Contribute enough to get the full match and put the rest of your retirement contributionsin a Roth IRA.+ If you can afford to contribute more than the match plus $5,500, put the extra into the 401(k) until it s maxed out. Great! ax out your 401(k) and a Roth IRA;** then open a taxable brokerag account. Great! ax out your 401(k) and a nondeductible IRA; then open a taxable *By income, we mean your modified adjusted gross income. This convoluted name reflects the convoluted way in which it is calculated. First you subtract various items, such as education expenses or IRA contributions, from your income to determine your adjusted gross income (which is used for tax purposes). Then you add back in other items, such as student-loan deductions and foreign income, to get your modified adjusted gross income. +The rules for eligibility and contribution limits for a Roth IRA change every year. In 2014, if your modified adjusted gross income was less than $181,000, you could contribute the maximum amount, which was $5,500 (or $6,500 if you were fifty or older). If your modified adjusted gross income was between $181,000 and, you were eligible to make a partial contribution. **$23,000 is the combined 401(k) and IRA contribution limit, $17,500 and $5,500 respectively (in 2014). 7

9 Retirement Accounts Inventory TYPE (401(k), Roth 401(k), Traditional IRA, n-deductible IRA, Roth IRA, Taxable Account) DOES YOUR EPLOYER ATCH? PERCENT ATCHED CURRENT CONTRIBUTIONS HOW OFTEN DO YOU CONTRIBUTE ACTION ITE 8

10 You ade It! Next Steps to Consider Research your employee-sponsored retirement account options and any matching or vesting policies. If you ve decided to do so, enroll in your employee-sponsored account If you ve decided to open additional retirement accounts, research brokerage firms and the investment options they provide. Once you ve decided upon a provider you like, open up any additional retirement accounts. Set up automatic contributions to your accounts. If you aren t contributing up to your 401(k) company match, try to do so or set calendar alerts to boost your contributions every six months until you are meeting your match. Schedule quarterly or annual calendar reminders to review your investments to see if they need rebalancing. Work With Your Own Planner You ve earned a $ credit* to get a custom program for your money, designed by a dedicated LearnVest Planner. *$24.99 will be credited to the cost of the set-up fee for the 5-Year Planner or the Portfolio Builder. Enter code: 67GX432UT at checkout to redeem. Cannot be combined with other offers. LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other s products, services or policies, and the references to any third-party materials are not an endorsement or recommendation of any such materials. 9