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IRAsIRAs

Financial Planning for Women Financial Planning for Women

March 2006March 2006

Jean Lown & Tiffany SmithJean Lown & Tiffany Smith

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Why YOU need an IRAWhy YOU need an IRA

Americans are poorly prepared for long Americans are poorly prepared for long retirements retirements in a changing worldin a changing world Life expectancy is risingLife expectancy is rising Health care costs are escalating rapidlyHealth care costs are escalating rapidly

Long term care costs are formidableLong term care costs are formidable Medicare is in far more trouble far sooner than Medicare is in far more trouble far sooner than

SSSS Lower investment returns (J. Clements, WSJ)Lower investment returns (J. Clements, WSJ) Traditional company pensions are Traditional company pensions are

disappearingdisappearing

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More Reasons for IRAMore Reasons for IRA

DEBT!! (2004 SCF)DEBT!! (2004 SCF) Debt growing faster than wealthDebt growing faster than wealth Credit card debt up 27% in past 5 yearsCredit card debt up 27% in past 5 years 18% are leasing vehicles rather than buying– 18% are leasing vehicles rather than buying–

high mo. payments but no asset to show high mo. payments but no asset to show Mortgage debt growing faster than home Mortgage debt growing faster than home

equityequity 19% of retirees still owe mortgage (Avg. $31K)19% of retirees still owe mortgage (Avg. $31K)

More college grads with high debtMore college grads with high debt Today’s retirees in much better situation Today’s retirees in much better situation

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J. Clement’s Simple testJ. Clement’s Simple test

Sum retirement plan values + Sum retirement plan values + investmentsinvestments

Add: home equity you plan to free up by Add: home equity you plan to free up by downsizing at retirementdownsizing at retirement

Subtract: Subtract: all all your debts your debts (mortgage, auto…)(mortgage, auto…) Assume you can withdraw 5%/yearAssume you can withdraw 5%/year

If you have $300,000, 5% = $15,000/yrIf you have $300,000, 5% = $15,000/yr Plus Social Security & any pensionPlus Social Security & any pension

Most Americans need to invest much more!Most Americans need to invest much more!

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Individual Retirement AccountsIndividual Retirement Accounts

OverviewOverview What is an IRA?What is an IRA? Why contribute? Why contribute? Who can contribute? Who can contribute? How much can you contribute? How much can you contribute? What are tax advantages?What are tax advantages? Where to invest? Where to invest? What if I need my money before What if I need my money before

retirement? retirement? Retirement Savings Credit Retirement Savings Credit

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What is an IRA? What is an IRA?

Individual investment account (not Individual investment account (not joint)joint)

For retirementFor retirement A tax sheltered way to saveA tax sheltered way to save

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Why Contribute? Why Contribute?

How much do you need to live on in How much do you need to live on in retirement? retirement?

Will your 401(k), 403(b) be enough? Will your 401(k), 403(b) be enough? How could saving a little bit a month How could saving a little bit a month

possibly help?possibly help?

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Power of Monthly InvestmentsPower of Monthly Investments

$50 @ 8% for 15 years = $17,417

$50 @ 8% for 25 years = $47,868

$50 @ 8% for 35 years = $115,459

$100 @ 8% for 15 years = $34,834

$100 @ 8% for 25 years = $95,737

$100 @ 8% for 35 years = $230,918

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Individual Retirement AccountsIndividual Retirement Accounts

IRAs allow workers to set up personal IRAs allow workers to set up personal retirement accounts invested in retirement accounts invested in Stock and/or bondStock and/or bond

individual securities or mutual fundsindividual securities or mutual funds CDs (too conservative!)CDs (too conservative!) other types of investmentsother types of investments

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Who Can Contribute? Who Can Contribute?

Any worker with earned incomeAny worker with earned income No age minimumNo age minimum

Worker’s Spouse Worker’s Spouse may contribute to a spousal IRA for non-may contribute to a spousal IRA for non-

employed spouse employed spouse

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Individual Retirement AccountsIndividual Retirement Accounts

$4,000/year contribution limit out of $4,000/year contribution limit out of earned income (2006)earned income (2006)

$5,000/year limit for workers age 50 $5,000/year limit for workers age 50 and olderand older

investment earnings are investment earnings are tax-tax-shelteredsheltered until withdrawn until withdrawn

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IRA Contribution LimitsIRA Contribution Limits

11stst 27 years: $2,000/year 27 years: $2,000/year 2001 tax law changes2001 tax law changes 2002-2004: $3,000 2002-2004: $3,000 2005-2007 2005-2007 $4,000$4,000 2008 and after: $5,000*2008 and after: $5,000*

Adjusted for inflation in $500 incrementsAdjusted for inflation in $500 increments

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IRA Contribution Limits age 50+IRA Contribution Limits age 50+

2002-2005: + $5002002-2005: + $500 2005: $4,5002005: $4,500 2006 and after: + $1,0002006 and after: + $1,000

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Two Types of IRAsTwo Types of IRAs

TraditionalTraditional Tax-deductible contributionsTax-deductible contributions Non-deductible contributionsNon-deductible contributions

Roth (newer type)Roth (newer type) Contributions Contributions not not tax-deductibletax-deductible Withdrawals free of taxes in retirementWithdrawals free of taxes in retirement

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Traditional Deductible IRAsTraditional Deductible IRAs

Workers Workers not coverednot covered by an employer by an employer plan may make tax-deductible plan may make tax-deductible contributions of up to $4,000 ($5,000 contributions of up to $4,000 ($5,000 for 50 and older) per yearfor 50 and older) per year

Workers who Workers who are coveredare covered by an by an employer plan employer plan maymay be able to make be able to make tax-deductible contributions tax-deductible contributions depending on incomedepending on income

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Income tax deductionIncome tax deduction

= Marginal tax rate (MTR) x = Marginal tax rate (MTR) x contributioncontribution

What is your MTR? What is your MTR? Highest rate at which your income is Highest rate at which your income is

taxedtaxed 10%, 15%, 25%, 28%, 35%, 3810%, 15%, 25%, 28%, 35%, 38

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Find out your MTBFind out your MTB

Use tax tablesUse tax tables Amount of taxable income? Amount of taxable income?

Amount of taxAmount of tax To find MTB add $100 to taxable To find MTB add $100 to taxable

incomeincome Amount of tax? Amount of tax?

$ difference in amount of tax = MTB$ difference in amount of tax = MTB

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2006 Tax Brackets: Single2006 Tax Brackets: Singlebased on based on Taxable IncomeTaxable Income(after subtracting PE & SD)(after subtracting PE & SD)

$0 to $7,550$0 to $7,550 10%10% 7,551 to 30,6507,551 to 30,650 15%15% 30,651 to 74,20030,651 to 74,200 25%25% 74,201 to 154,80074,201 to 154,800 28%28% 154,801 to 336,550154,801 to 336,550 33%33% 336,551 and higher336,551 and higher 35%35%

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Non-Deductible, After-Tax IRAsNon-Deductible, After-Tax IRAs

Available to workers covered by an Available to workers covered by an employer plan whose incomes are too high employer plan whose incomes are too high to qualify for a deductible IRAto qualify for a deductible IRA

Contributions are Contributions are notnot tax deductible tax deductible Investment Investment earnings are tax-shelteredearnings are tax-sheltered

until withdrawn.until withdrawn. Rarely used since Roth IRAs introducedRarely used since Roth IRAs introduced

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Roth IRAsRoth IRAs

Contributions are Contributions are not tax-deductiblenot tax-deductible..

InvestmentInvestment earnings earnings are are tax-shelteredtax-sheltered..

Tax-free and penalty-free withdrawals of Tax-free and penalty-free withdrawals of earnings may be made after age 59 ½.earnings may be made after age 59 ½.

Thus, it is possible to never have to pay Thus, it is possible to never have to pay taxes on Roth IRA taxes on Roth IRA earningsearnings..

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Roth IRA Income LimitsRoth IRA Income Limits

BUT cannot contribute to Roth if BUT cannot contribute to Roth if modified adjusted gross income modified adjusted gross income (MAGI)> (MAGI)> $110,000 single filer$110,000 single filer

$160,00 joint filer$160,00 joint filer

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What if I need my money early? What if I need my money early?

Roth Roth contributions contributions can be can be withdrawn at anytime withdrawn at anytime

May not borrow from IRAMay not borrow from IRA

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Roth IRA Withdrawals Roth IRA Withdrawals

Tax-free and penalty-free withdrawals Tax-free and penalty-free withdrawals of earnings are allowed:of earnings are allowed: if you become disabledif you become disabled for buying your first home for buying your first home or for your children’s (or your own) or for your children’s (or your own)

education expenses*education expenses*

As long as the earnings are from As long as the earnings are from funds invested for at least 5 yearsfunds invested for at least 5 years

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Where to Invest? Where to Invest?

IRAs allow workers to set up personal IRAs allow workers to set up personal retirement accounts invested in a retirement accounts invested in a wide variety of investmentswide variety of investments Stock/bond mutual fundsStock/bond mutual funds other types of investmentsother types of investments

Starting from scratch or…Starting from scratch or… Complementing your employer plan?Complementing your employer plan?

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Getting StartedGetting Started

If no other retirement planIf no other retirement plan Choose a stock mutual fundChoose a stock mutual fund

Growth potentialGrowth potential Broad diversificationBroad diversification

Invest for as little as $50/monthInvest for as little as $50/month T. Rowe Price mutual fundsT. Rowe Price mutual funds

Allow $50 automatic Investment Plan (AIP)Allow $50 automatic Investment Plan (AIP) Automatic monthly transfer from checking to MFAutomatic monthly transfer from checking to MF

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Complementing Employer Plan Complementing Employer Plan

Review employer optionsReview employer options Determine your asset allocationDetermine your asset allocation What investment categories are What investment categories are

missing? missing? International investments? International investments? Small cap stocks? Small cap stocks? Real estate? Real estate?

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Distributions from Traditional IRAsDistributions from Traditional IRAs

Penalty-free withdrawals can begin at Penalty-free withdrawals can begin at age 59 ½.age 59 ½.

Taxes are owed on these withdrawals Taxes are owed on these withdrawals Withdrawals must begin by age 70 ½.Withdrawals must begin by age 70 ½.

Generally, withdrawals must be made Generally, withdrawals must be made at a rate that would exhaust the fund at a rate that would exhaust the fund over your remaining life expectancy.over your remaining life expectancy.

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Retirement Savings Contribution Retirement Savings Contribution CreditCredit

For low & moderate income taxpayersFor low & moderate income taxpayers For retirement investingFor retirement investing Tax creditTax credit of up to $0.50 for each of up to $0.50 for each

$1.00 up to the first $2,000 you $1.00 up to the first $2,000 you contribute to your employer's plan or contribute to your employer's plan or to an IRAto an IRA

Maximum tax credit is $1,000Maximum tax credit is $1,000 Expires after the 2006 tax yearExpires after the 2006 tax year

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Retirement Contribution CreditRetirement Contribution Credit

Married Married Couples Couples Filing Filing JointlyJointly

Heads of Heads of HouseholdsHouseholds Single FilersSingle Filers

Percent Percent of Tax of Tax CreditCredit

$0–$30,000$0–$30,000 $0–$22,500$0–$22,500 $0–$15,000$0–$15,000 50%50%

$30,000–$30,000–$32,500$32,500 $22,500–$24,375$22,500–$24,375

$15,000–$15,000–$16,250$16,250 20%20%

$32,500–$32,500–$50,000$50,000 $24,375–$37,500$24,375–$37,500

$16,250–$16,250–$25,000$25,000 10%10%

Over $50,000Over $50,000 Over $37,500Over $37,500 Over $25,000Over $25,000 0%0%

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Choosing a Stock MF for IRAChoosing a Stock MF for IRA

May FPW program (2005 & 2006)May FPW program (2005 & 2006) Stock Mutual Funds for Your IRAStock Mutual Funds for Your IRA

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Questions on IRAs? Questions on IRAs?

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Upcoming FPW Upcoming FPW

April 12: Avoiding Investment FraudApril 12: Avoiding Investment Fraud May 10: The Best Mutual Funds for May 10: The Best Mutual Funds for

Your IRAYour IRA Low cost stock mutual funds for as little Low cost stock mutual funds for as little

as $50/monthas $50/month June 12: Social Security, Sandy June 12: Social Security, Sandy

Hunter, SSA Hunter, SSA

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Women & Financial Planning Women & Financial Planning ResearchResearch

Study is being expanded beyond Study is being expanded beyond baby boomer womenbaby boomer women Please fill out a surveyPlease fill out a survey Some survey respondents will be invited Some survey respondents will be invited

to participate in a focus group ($25 to participate in a focus group ($25 compensation)compensation)

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URS SeminarsURS Seminars

For workers within 5 years of For workers within 5 years of retirementretirement In Logan Thursday, May 18, 9 am - 4 pmIn Logan Thursday, May 18, 9 am - 4 pm

Personal Financial Planning SeminarPersonal Financial Planning Seminar In Ogden Friday, May 12, 9 am – 4 pmIn Ogden Friday, May 12, 9 am – 4 pm

Register with URS: Register with URS: www.urs.orgwww.urs.org 800-753-7750800-753-7750