NORTHERN FUNDS TRADITIONAL IRA. investor guide

Transcription

1 NORTHERN FUNDS TRADITIONAL IRA investor guide TRUST NORTHERN for a lifetime of investing

2 LOOK FORWARD Retirement isn t about age. It s about possibilities, and dreams for your future. At Northern Funds, we believe there s no better time than now to begin saving for retirement. Whether you are making an annual contribution, rolling over from a qualified retirement plan, or transferring an existing IRA account, we believe a Northern Funds no-fee IRA offers you a unique combination of features and benefits. And now, with new higher IRA contribution limits, there s never been a better time to set aside even more for your retirement years. In this guide, you ll learn more about the advantages of Traditional IRAs and whether one makes sense for you. You ll also discover the benefits of opening your Traditional IRA with Northern Funds, which offers 19 mutual funds ideal for retirement investing. Best of all, opening a Northern Traditional IRA requires just three simple steps (see page 4 to find out how). If at any point you have questions about Traditional IRAs, contact the Northern Funds IRA Specialists at 800/590-9IRA, visit our Web site at northernfunds.com, or speak with one of our Northern Trust Relationship Managers. 1 YOU CAN SAVE MORE FOR RETIREMENT 2 WHAT YOU NEED TO KNOW ABOUT TRADITIONAL IRAs 4 TRUST NORTHERN FUNDS TO BE YOUR TRADITIONAL IRA PARTNER 4 IT S SIMPLE TO OPEN A TRADITIONAL IRA 5 WHICH IRA IS RIGHT FOR YOU? NOT FDIC INSURED May lose value / No bank guarantee

3 YOU CAN SAVE MORE for retirement Achieving the retirement of your dreams involves careful planning and smart investing. It also means knowing your options. To help you in your pursuit of a secure retirement, we ve compiled basic information you need to know about Traditional IRAs and the tax-deferred growth potential they offer. Keep in mind that the rules for IRA investing can be complicated, so talk to your tax advisor about your individual situation. 1TRADITIONAL IRA New IRA Rules Make Investing More Attractive Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, you now can save more for retirement. As a Traditional IRA investor, here are just some of the new opportunities available to you: Increased annual contributions. In previous years, Traditional IRA contributions were capped at $2,000 per year. Beginning in 2002, however, IRA account holders will be eligible to contribute more. YEAR MAXIMUM ANNUAL CONTRIBUTION $3,000 $4,000 $5, After 2008, indexed for inflation. Catch-up contributions. Also beginning in 2002, taxpayers age 50 and older can make additional catch-up contributions to their IRA. These extra contributions can total $500 a year between 2002 and The amount will increase to $1,000 in Higher income limits. By increasing the income limits for Traditional IRA participants, more people can now make tax-deductible IRA contributions. IT PAYS TO TAKE ADVANTAGE OF NEW IRA CONTRIBUTION LIMITS Steven and Rebecca are 30 years old. Each opens a Traditional IRA on January 1, 2002, and earns a hypothetical 10% return until retirement at age 60. Steven invests $2,000 every year the pre-2002 annual IRA contribution limit until retiring. Rebecca, meanwhile, invests the new maximum contribution every year (see adjacent chart for changing limits through 2008). What happens when they retire? The more you set aside for retirement by contributing the maximum amount each year, the more likely you are to achieve your long-term dreams. Increased flexibility to transfer IRA assets. IRA owners now have increased flexibility to transfer savings between employer-sponsored retirement plans and IRAs. $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 STEVEN invests $2,000 every year REBECCA invests the new maximum every year $ Age $1,002,104 $400,276 This is a hypothetical example intended to illustrate the benefits of making the maximum annual contributions each year and the principle of tax-deferred compounding. It assumes an annual 10% return for both investors and contribution amounts indexed at a 3% inflation rate starting in 2009 for Rebecca. This example assumes no legislation changes increasing or decreasing annual contribution limits, and does not represent the past or future performance of any specific Northern Funds investment.

4 TRADITIONAL IRA 2 What you NEED TO KNOW about TRADITIONAL Making the most of your Traditional IRA means understanding how various rules can affect your ability to save for retirement. Below are answers to common questions Northern Funds receives from investors. Please keep in mind, IRA tax laws can be complicated, so we recommend talking to your tax advisor about your individual situation. Am I eligible? If you have earned income and are under age 70 1 /2, you can contribute up to the maximum IRA contribution amount or 100% of your earned income, whichever is less each year to a Traditional IRA. If you are married, you and your spouse may each contribute the maximum contribution amount, even if only one of you has earned income. Are my contributions tax-deductible? in such a plan, you can make a tax-deductible contribution regardless of your income. If you are married and your spouse participates in an employer-sponsored retirement plan but you don t, you can make a tax-deductible contribution, as long as your adjusted gross income is under $160, If you are unsure of your participation status, refer to the pension plan box on your W-2 form. Assuming you and your spouse, if you are married and file jointly participate in an employer retirement plan, you may be eligible to make deductible IRA contributions if your income falls within certain guidelines. See the chart below. If your income is lower than the range provided, your contribution may be fully deductible. If your income is higher, then your contribution isn t deductible. And if your income falls in between, your contribution may be partially deductible. Whether your Traditional IRA contributions are tax-deductible depends on two factors: your income level and whether you actively participate in an employer-sponsored retirement plan. 2 If you are single and don t participate CAN I DEDUCT MY TRADITIONAL IRA CONTRIBUTIONS? Assuming you participate in an employer retirement plan, contributions may be fully deductible if you fall below the range and partially deductible if you fall within the range. YEAR SINGLE FILER ADJUSTED GROSS INCOME $34,000 44,000 $40,000 50,000 $45,000 55,000 $50,000 60,000 $50,000 60,000 $50,000 60,000 JOINT FILERS ADJUSTED GROSS INCOME $54,000 64,000 $60,000 70,000 $65,000 75,000 $70,000 80,000 $75,000 85,000 $80, ,000

5 IRAs How long can I contribute? You may contribute to a Traditional IRA until the year in which you turn age 70 1 /2. Can I withdraw from my Traditional IRA? If you are older than age 59 1 /2, you can withdraw from your account at any time, with the withdrawal considered taxable income. But if you are younger than 59 1 /2, you may face a 10% early withdrawal penalty. The penalty is subject to certain exceptions, including: Death or disability. The distribution of substantially equal periodic payments made over your life expectancy. CONSIDER IRAs FOR ESTATE-PLANNING Besides offering tax-deferred growth potential, investing in a Traditional IRA can provide more flexibility in estate planning than qualified retirement plans such as 401(k), 403(b), and profit-sharing plans. That s because qualified retirement plans generally make a lump-sum distribution to your beneficiaries. But receiving money in one lump-sum payout could cause significant income tax concerns for your children, grandchildren, or other beneficiaries. With an IRA, your beneficiaries can elect a life-expectancy option, allowing them to stretch withdrawals over their lifetimes. The advantage? Your beneficiaries may be able to save on taxes while maximizing the tax-deferral benefits of your retirement assets for as long as possible. Keep in mind that distribution rules for qualified retirement plans and IRAs are complex. Consult your tax advisor or attorney in order to make the best choice for your situation. 3TRADITIONAL IRA Major medical expenses that exceed 7.5% of your adjusted gross income. Payment of health insurance premiums if you ve received unemployment compensation for 12 weeks or more. First-time home-purchase expenses, subject to a lifetime maximum of $10,000. Qualified higher-education expenses such as tuition, room and board, books, supplies, and equipment for you and your family. You must begin taking withdrawals from your Traditional IRA by April 1 of the year following the year you reach 70 1 /2. If you don t take required minimum distributions by that age, you may face a 50% excise tax on amounts not distributed. Keep in mind that your account earnings and any deductible contributions will be subject to federal income taxes at your income-tax rate at the time of withdrawal. Remember that IRAs are designed for retirement savings. If you withdraw money for other purposes, you may find it more difficult to achieve that dream retirement.

6 TRADITIONAL IRA TRUST NORTHERN FUNDS to be your TRADITIONAL IRA PARTNER 4 By choosing Northern Funds as your Traditional IRA custodian, you get access to one of the most respected money managers in the country. And there are many other reasons to choose Northern Funds, including: Experienced management No-load, no-annual-fee investing 3 A wide selection of investments Our fund managers are experienced professionals and understand that investing for retirement means looking past the next quarterly performance review. With more than $330 billion in assets under management, Northern Funds advisor, Northern Trust, has been helping individuals reach their long-term goals for more than a century. IT S SIMPLE TO OPEN AN ACCOUNT When you open a Northern Funds Traditional IRA, you ll pay no commissions or fees to purchase, exchange, or redeem fund shares. That means 100% of your retirement investment can go immediately to work for you. You ll also pay no yearly IRA custodial or maintenance fees. 3 Although Northern mutual funds have no load, other fees and expenses do apply, as described in the prospectus. Opening a Northern Funds Traditional IRA isn t just a smart way to plan for your future it s easy to do. Just follow these three steps: 1. Choose your investments Select the Northern Funds that you believe can help you reach your dreams for retirement, taking into account your investment objectives, timeframe, and risk tolerance. A Northern Trust Relationship Manager also can help you select the investments that make the most sense for your individual situation. You also can call a Northern Funds IRA Specialist at 800/590-9IRA for help or visit our Web site at northernfunds.com. Please read the prospectus carefully before investing. You can choose from a complete family of Northern Funds investments with 19 funds ideal for retirement investing, including domestic and international equity, and fixed income funds. Outstanding service With Northern Funds, you ll have access to a full range of service, including: Convenient online access to your accounts through northernfunds.com. Consolidated account statements that make keeping track of your Northern Funds investments easy. Northern Funds IRA Specialists, ready to help you at any point during the investment process at 800/590-9IRA, from 7:00 a.m. to 7:00 p.m. Central time. 2. Fill out the Traditional IRA application enclosed in this kit The application includes space to indicate your investment options from step Mail your application Using the envelope provided, mail your completed application to: Northern Funds Center, P.O. Box 75986, Chicago, IL

7 WHICH IS RIGHT FOR YOU? You have many IRA options to consider including the Traditional IRA. For your convenience, we ve provided a quick comparison of the different types of IRAs we offer and that you can choose for your retirement savings. TRADITIONAL IRA ROTH IRA SEP IRA WHO IS ELIGIBLE TO INVEST? Anyone under age 70 1 /2 with earned income during the year, regardless of income level Anyone with earned income below $95,000 (single filers) or $150,000 (married, filing jointly) Self-employed individuals and business owners plus eligible employees WHAT IS THE MAXIMUM ANNUAL CONTRIBUTION ALLOWED? The lesser of 100% of earned income or $3,000 ( ) $4,000 ( ) $5,000 (2008; indexed for inflation in later years) The lesser of 100% of earned income or $3,000 ( ) $4,000 ( ) $5,000 (2008; indexed for inflation in later years) The lesser of 15% of earned income or $30,000 (in 2002; indexed for inflation thereafter) IS THE CONTRIBUTION TAX-ADVANTAGED? Yes, tax-deferred growth of contributions and investment earnings Yes, tax-free growth of investment earnings Yes, tax-deferred growth of contributions and investment earnings IS THE CONTRIBUTION TAX-DEDUCTIBLE? Yes, if your income is below certain limits or if you are not an active participant in an employer-sponsored retirement plan (see page 2) No, the contribution must be made with after-tax dollars Yes, contributions are deductible by the employer ARE PENALTY-FREE WITHDRAWALS ALLOWED PRIOR TO AGE 59 1 /2? Yes, if used for first-time home expenses ($10,000 lifetime maximum), qualified higher education expenses, or for certain hardships (see page 3) Yes, if used for first-time home expenses ($10,000 lifetime maximum), qualified higher education expenses, or for certain hardships (see page 3) Yes, if used for first-time home expenses ($10,000 lifetime maximum), qualified higher education expenses, or for certain hardships (see page 3) ARE MANDATORY DISTRIBUTIONS REQUIRED? Yes, distributions must begin by April 1 following the year you turn 70 1 /2 No, you may postpone distributions for as long as you like during your lifetime Yes, distributions must begin by April 1 following the year you attain age 70 1 /2 The information contained in this brochure is based on a current interpretation of language in the federal Economic Growth and Tax Relief Reconciliation Act of In some states, the state income tax laws for IRAs can be different from the federal income tax laws. Investors should consult with their tax advisor for advice and information concerning their particular tax situation and any updates to the tax laws. FOR MORE INFORMATION ON OPENING A NORTHERN FUNDS IRA, CALL US TODAY AT IRA.

8 This booklet must be preceded or accompanied by a current prospectus. Investors are reminded to read it carefully before investing Northern Trust Corporation. Northern Funds Distributors, LLC, an independent third party. IRA BRO 02/02 50 South LaSalle Street P.O. Box Chicago, Illinois IRA northernfunds.com