RETIREMENT PLANNING
There are numerous vehicles
to properly plan for retirement. The following is a discussion of some of the
more popular approaches.
ROTH IRA
Roth IRAs allow individuals within certain
income levels to make non-deductible contributions. Earnings are not taxed at
the time of distribution as long as they are held for at least five years and
you are age 59 1/2 or older when the money is withdrawn. Unlike traditional
IRAs, distributions do not have to begin at age 70 1/2. Beginning in 2005, if
you are single or a head of household you may contribute $4,000 ($4,500 if over
age 50) if your income does not exceed $95,000 (a partial contribution is
available for incomes up to $110,000). If you are married with a
combined income up to $150,000, you are eligible to contribute to a Roth IRA (a
partial contribution can be made by married couples with a combined income up to
$160,000). However, you should note that contributions to a traditional IRA
will reduce the amount that you may contribute to a Roth IRA.
Traditional IRAs
All earnings on traditional IRAs are
tax-deferred-taxes on earnings are not paid until you withdraw your money. You
must begin making withdrawals from your IRA by age 70 1/2.
Deductible IRA
If you, or you and
your spouse, are employed but not covered by a company pension plan, generally
you each may contribute up to the maximum every year to an IRA and deduct your
contribution from your taxable income. In a one-income family, the unemployed
spouse also may contribute to a spousal IRA.
If you (or you and
your spouse) are covered by a company pension plan, you still may be able to
make deductible contributions to an IRA based your modified adjusted gross
income (AGI). For single taxpayers or heads of households the 2003 limit is
$40,000, with a partial deduction available for modified AGIs of up to $50,000.
For married couples the combined modified AGI limit for tax-deductible
contributions is $60,000; a partial deduction can be taken for modified AGIs up
to $70,000.
DEDUCTIBLE IRA FOR YOUR SPOUSE
A married couple with one employed spouse may each contribute up to
$3,000 (or $3,500 if age 50 or older) to an IRA as long as the employed spouse
earns at least as much as their combined contributions. Under certain
conditions, if you work, but only your spouse is covered by an
employer-sponsored retirement plan, you may qualify for a full IRA tax deduction
if your joint modified AGI is below $150,000. A partial deduction applies if for
a joint modified AGI between $150,000 and $160,000.
Taxpayers who
exceed the income limits for the deductible IRA (and the Roth IRA, discussed
next) can contribute up to $3,000 (or $3,500 if age 50 or older) to a
nondeductible IRA. While contributions cannot be deducted from income for tax
purposes, earnings are not taxed until they are withdrawn.
Annuities
An annuity is a contract with an insurance
company. Every annuity has two basic properties: whether the payout is
immediate or deferred, and whether the investment type is fixed or variable. An
annuity with immediate payout begins payments to the investor immediately,
whereas the deferred payout means that the investor will receive payments at a
later date. An annuity with a fixed investment type offer a guaranteed return on
investment by investing in government bonds and other low-risk securities,
whereas a variable investment type means that the return on the annuity
investment will depend on performance of the funds (called sub-accounts) where
the money is invested. Based on these two properties with two possibilities
each, there are four possible combinations, but the ones commonly seen in
practice are an annuity with immediate payout and fixed investments (often known
as a fixed annuity), and an annuity with deferred payout and variable
investments (variable annuity).
Fixed Annuities
The idea of a
fixed annuity is that you give a sum of money to an insurance company, and in
exchange they promise to pay you a fixed monthly amount for a certain period of
time, either a fixed period or for your lifetime (the concept of 'annuitization').
So essentially you are converting a lump sum into an income stream.
Variable Annuities
A variable annuity is
essentially an insurance contract joined at the hip with an investment product.
Annuities function as tax-deferred savings vehicles with insurance-like
properties; they use an insurance policy to provide the tax deferral. The
insurance contract and investment product combine to offer the following
features:
1.
Tax deferral on earnings.
2.
Ability to name beneficiaries to receive the balance remaining in the
account on death.
3.
Annuitization -- the ability to receive payments for life based on your
life expectancy.
4.
The guarantees provided in the insurance component.
A variable annuity
invests in stocks or bonds, has no predetermined rate of return, and offers a
possibly higher rate of return when compared to a fixed annuity. The variable
annuity investments grow tax-deferred. Any gains from the annuity are not taxed
until money is withdrawn. The insurance portion of the annuity also may provide
certain investment guarantees, such as guaranteeing that the full principal
(amount originally contributed to the account) will be paid out on the death of
the account holder, even if the market value was low at that time.
