MOAA Caregivers Guide: Planning For Retirement

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1 MOAA Caregivers Guide: Planning For Retirement To obtain financial security during your retirement years, start planning for it now. The most powerful factor is time. Starting to invest now for retirement offers two essential tools for accumulating the most assets possible: compound interest and long-term growth potential. Why start now? The sooner you begin, the more money you may be able to accumulate. You do not know how long retirement will be. With longer life expectancies, you could need enough savings to last 20 years or more. If you are a spouse caregiver, you will not be able to use the caregiver stipend as earned income and generally will not be able to contribute to traditional types of retirement accounts, unless in addition to being a spouse caregiver, you are currently employed or were employed at some time during the year. If this is the case, you may have access to an employer s retirement plan and/or be eligible to contribute to an Individual Retirement Account (IRA). If you do not have earned income, consider saving in a deferred annuity and or a taxable account. Investment options <subhead> Individual retirement accounts (IRAs) These tax-advantaged retirement accounts are not investments in their own right, but they house investments. An IRA can be opened and its account balance invested in mutual funds, individual securities offered through a brokerage firm, certificates of deposit (CDs), or an annuity offered through a life insurance company. Contributions may be taxable for federal income tax purposes, depending on the type of IRA. A financial planning professional can help determine which IRA you should consider. For more information, see IRS Publication 590, Individual Retirement Arrangements, available at irs.gov.

2 Traditional IRA With a Traditional IRA, you may be able to deduct your contribution from your taxable income, thus reducing current federal income taxes. This depends on your income and if you are covered by a retirement plan at work. While your money grows, taxes are deferred. You will be subject to ordinary federal income taxes when you withdraw the money, generally at retirement. Any individual under age 701/2 with earned income is eligible. Qualified individuals under age 50 may contribute a maximum of $5,500 for For married couples filing jointly where only one spouse has earned income, $11,000 for 2013 may be split between a spousal IRA and an individual IRA with no more than $5,500 being deposited in either account. Taxpayers age 50 or older by December 31 can make an additional $1,000 contribution. Contributions may be deductible from your taxable income for federal income tax purposes depending on how you file your income tax return; whether you and your spouse participate in a retirement plan at work; and the amount of your modified adjusted gross income (MAGI). Even if you cannot deduct an IRA contribution from your income, you may still contribute if you have earned income. Generally, money distributed to TRADITIONAL IRA VS. ROTH IRA Roth IRA With a Roth IRA, you cannot deduct your contribution from your income for federal income tax purposes. However, qualified withdrawals of contributions and earnings are free of federal income tax and penalties. Any individual with earned income is eligible, regardless of age. Qualified individuals under age 50 may contribute a maximum of $5,500 for Contributions are phased out for individuals with modified adjusted gross income (MAGI) exceeding certain limits. For married couples filing jointly where only one spouse has earned income, $11,000 for 2013 may be split between a spousal Roth IRA and an individual Roth IRA with no more than $5,500 being deposited in either account. Taxpayers age 50 or older by December 31 can make an additional $1,000 contribution. Contributions are not deductible for federal income tax purposes. However, qualified withdrawals of contributions and earnings are free of federal income tax and penalties. Contributions and earnings are eligible for access as qualified withdrawals if the account has

3 you from your IRA before age 591/2 is subject to federal income tax and a 10% penalty. Withdrawals can be made without penalty for certain qualified distributions which include: o Distributions taken as an annuity income stream as qualified first-time homebuyer expenses (subject to a lifetime limit of $10,000). o Distributions taken due to a qualified disability as qualified unreimbursed medical expenses as qualified education expenses. medical insurance premiums if the account owner is unemployed. o Distributions taken after the owner s death as defined by the Internal Revenue Code. o Qualified, nontaxable rollovers. qualified reservist distributions. Mandatory withdrawals required at age 701/2. been open at least 5 years and one of the following occurs: o You have reached age 591/2 by the time of the withdrawal. due to qualifying disability. for first-time homebuyer expenses ($10,000 lifetime limit). by your beneficiary or estate after your death. o The withdrawal is taken as an annuity income stream as defined by the IRS. for qualified unreimbursed medical expenses as for medical insurance premiums if the account owner is unemployed. o The withdrawal is taken for qualified education expenses. o The withdrawal is taken for a qualified reservist distribution. o All other types of withdrawals are generally subject to federal income taxes and a 10 percent penalty on the amount of earnings withdrawn. There is no mandatory requirement to withdraw money during the Roth IRA owner s lifetime. Other Investment Options Deferred Annuity All individuals, even those who

4 do not have earned income, are eligible to make contributions to a deferred annuity. Earnings on contributions grow tax deferred. Earnings taken from the deferred annuity prior to age 59 ½ are generally subject to taxes and a 10 percent penalty. Taxable Accounts All individuals, even those who do not have earned income, are eligible to save in a taxable account. A taxable account can be opened and its account balance invested in mutual funds, individual securities offered through a brokerage firm, and certificates of deposit (CDs). All account earnings are taxable in the year they are earned. Thrift Savings Plan (TSP) Servicemembers have another tax advantaged option the government sponsored TSP, which generally works like a 401(k) plan offered by some civilian employers. You may contribute any whole percentage of your basic pay, bonus pay, incentive pay or special pay, before federal income taxes, up to $17,500. If you are receiving tax-exempt pay, your contributions from that pay will also be tax-exempt; however, the earnings will be taxed when you take a withdrawal. Federal income taxes are deferred on contributions, and until they are withdrawn at retirement for traditional contributions.

5 TSP investment funds <chart> You may allocate your monthly contribution to any or all of the following funds. You can also transfer money in your account between funds. G Fund Government Securities Investment F Fund Fixed Income Index Investment C Fund Common Stock Investment S Fund Small Capitalization Stock Index Investment I Fund International Stock Index Investment Invests in short-term, non-marketable Treasury securities. Invests in a mix of U.S. government, corporate and mortgage backed bonds. Tracks the performance of the Barclays Capital U.S. Aggregate Bond Index. Invests in stocks of large and mediumsized U.S. companies. Tracks the performance of the Standard & Poor s 500 Stock Index. Invests in stocks of small and mediumsized U.S. companies. Tracks the performance of the Dow Jones U.S. Completion Total Stock Market (TSM) Index. Invests in international stocks of 21 developed countries. Tracks the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Stock Index. L Fund Lifecycle A mix of the five funds currently available, chosen based on the date you expect to need money at retirement. For more information, visit the TSP website at tsp.gov Roth TSP <chart> In 2012, the TSP began offering a Roth TSP. The following are details of the new option. The Roth TSP combines the benefits of a traditional TSP with the after-tax benefits of a Roth 401(k). You do not get the benefits of tax-deferred savings (upfront tax deduction) on Roth TSP contributions as you do with traditional TSP contributions, but Roth TSP contributions and earnings on those contributions will grow federal income tax free. The Roth TSP allows you to invest in the same funds as the traditional TSP. You pay no federal income taxes on withdrawals from the Roth TSP, as long as you are at least 591/2 years of age and have been making Roth contributions for

6 a minimum of 5 years. The Roth TSP functions like a Roth 401(k) plan and unlike a Roth IRA there are no income restrictions on contributions. The contribution limit for the Roth TSP is the same as the current contribution limit of $17,500 for the traditional TSP. This limit will remain the same between the Roth TSP and the traditional TSP. The Roth TSP, like a Roth 401(k), will not accept transfers from a Roth IRA. The Roth TSP, like a Roth 401(k), will require mandatory withdrawals at the age of 701/2. You have several options when separating from military service. Leave your money in the TSP. Withdraw all or part of your money. Transfer or roll over money to an IRA or eligible employer plan. If the servicemember for whom you care is medically retired and does not accept another job because of his/her disability status, the servicemember has the same options. The only thing that changes is the tax treatment of withdrawals. Qualifying For And Calculating Disability Retirement When the wounded warrior for whom you care receives his/her disability percentage assigned by the Physical Evaluation Board (PEB) you will know whether the servicemember qualifies for retirement or separation. The servicemember may also qualify for Combat-Related Special Compensation (CRSC) or Concurrent Retirement and Disability Pay (CRDP). CRSC was created for disability and non-disability military retirees with combat-related disabilities. It is a taxfree monthly entitlement. CRDP allows military retirees to receive both military retired pay and Veterans Affairs (VA) compensation. For more information about disability retirement, visit: National Guard and Reserve <subhead> National Guard and Reserve duty personnel are eligible for retirement pay after completing at least 20 years of service and reaching 60 years of age. The amount of pay is based on a point system geared to the type of active and inactive duty performed. Under the fiscal year 2009 National Defense Authorization Act, National Guard and Reserve members with 20 or more years may be eligible to receive retired pay prior to 60 years of age. Retirement-eligible personnel are able to reduce their retirement age by 3 months for every 90 consecutive days spent mobilized. Provisions of the law include: - Involuntary mobilization or voluntary active duty in support of contingency operations, to include deployment for war or national emergency.

7 - Active duty outside the continental U.S. is not required. - Training, operational support and school tours are generally included in active duty time. - Law applies to deployed time served after January 28, Servicemembers will receive retirement pay for life. The pay amount is periodically adjusted to the cost of living index. Upon the servicemember s death, his/her spouse and children will receive payments only if the servicemember arranges it through the Survivor Benefit Plan (SBP) before he/she retires. Choosing to participate in military financial programs available to veterans may affect their projected military retired pay. Allotments for participating in certain programs, such as the SBP, are deducted from military retired pay. These payments should be subtracted from the calculated retirement benefit amount. Provisions and rules of military pensions and other public sector plans may differ from those of private corporations. Contact your installation s finance, personnel or retirement and separations office with questions about your retired pay. Seek legal and tax advice for your specific situation. If the servicemember for whom you care is retiring from the National Guard or Reserves and you need information on calculating the servicemember s retired pay based on his/her disability status, visit militarypay.defense.gov/retirement/.