Free Information: IRA,401k
[2009 update: For Roth IRA and regular IRA the contribution limit is $5,000 plus a $1,000 catch-up provision if you are over 50]
[2007 update: The total limit of your retirement plan contributions is 15,500 . You can put up to 10,500 into a Simple IRA and $4,000 into an IRA or Roth IRA, more if you are over 50. Contact us for more details]
A great reference is form 590 from the IRS, it gives all the details on IRA's (in english!)
Important: Have a beneficiary designated for your account. This is very important for tax and probate.
In 2010 the income limitation for ROTH IRA's conversions will end.
Over age 70 1/2? It's time to start taking money out of your IRA. Here's a great calculator to determine how much you need. I double checked it with another source and it appears correct. I suggest taking out a little more than required just to be safe.
FINRA also has a simpler RMD calculator here
72t.net has another RMD calculator here, and lots of additional info.
Not sure how much you need to save for retirement? AARP has a very quick retirement calculator you may want to try.
Leaving your current job? Have a 401k? Not sure what to do with it? Contact Strategic Asset Management now. There are several simple but very important steps to ensure your 401k is safely transferred without any taxes or fines from the IRS.
With so many retirement plans available and changing tax laws, picking the best method for long-term saving is confusing. This paper will explain the benefits and drawbacks of the three most common choices: 401k, IRA, and Roth IRA. Each choice offers tax-deferred growth. While funds remain in the account you pay no taxes on any interest, long-term gains, or short-term gains. This tax advantage gives one a powerful incentive to sort out the advantages and drawbacks of these retirement plans. There are other retirement plans available to people, included SIMPLE plans, SEP-IRA, & 403(b), but the 401(k), Roth IRA, and IRA are the most common.
Please note I am not a tax professional. You should consult with your tax advisor before proceeding with any retirement vehicle.
Executive Summary: Dont give me details, tell me what to do
Here is the order of contributions which will maximize your after tax returns:
I have received some comments that its better to contribute to a conventional IRA instead of a Roth IRA. The advice I give above is of a general nature but I consider the Roth a better option for several reasons. Since your contribution to a Roth or Conventional IRA are limited, the contributions to a Roth are a higher net after-tax amount. 10,000 in a Roth IRA is worth more than 10,000 in a conventional IRA as taxes are due upon withdrawal from the conventional IRA.
Furthermore you are not required to remove money from your Roth IRA after age 70 1/2 as you are in an IRA. This allows one to keep your effective tax rate lower throughout over time, maximizing your after tax benefit.
+ Matching funds from employer. Your employer matches your contribution into your 401k. Its basically free money! ALWAYS contribute enough money to your 401(k) receive the maximum benefit from your employer.
+ High contribution rate: You can contribute up to $15,500 (for 2007) a year into your 401k, a much higher amount than either IRA option. The amount you can contribute will increase over time, indexed to inflation
+Income tax deduction in year of contribution: In the year you contribute the money to your 401k, you can deduct the amount placed in your 401(k) from your net income
-Limited flexibility: Employer plans are usually short on options. Some do allow flexibility, so inquire about your individual plans situation.
-Higher fees: There are always costs involved in administering complex plans such as 401(k)s. These administration costs will sneak into the products you purchase, and can be as high as 2.5%. Dig into the paperwork and see how much you are paying.
-Excludes IRA deductibility: If you contribute to a 401(k), you reduce or eliminate the income tax deductions you can take for an IRA.
-Taxable as income upon withdrawal: When you start withdrawing the money it is taxed as income. One needs to time these withdrawals to ensure they are not too high in any year, increasing your marginal tax rate.
-Fines for removing funds early
An IRA allows anyone to deposit up to $4,000/year (for 2007) into a tax deferred retirement account.
+Low to no fees on account: Opening an IRA account at any number of Mutual Funds or brokerage houses is easy and cheap. The market is very competitive, and you should be able to find one with no fees. (The broker I use has no IRA fees, and no minimums)
+Flexibility: Through an IRA at a stock brokerage firm, the options are vast. If its publicly traded, you can buy it in your IRA.
+/- deductible? Depending upon you income bracket and participation in other retirement plans (Roth IRA and 401ks) The money you deposit in an IRA may or may not be deductible.
-Low contribution rate, for those late in starting their retirement program, may not be enough.
-Taxed as income upon withdrawal.
-Fines for removing funds early.
-You must begin withdrawing money at age 70 1/2.
Similar to the standard IRA.
+ Low to no fees on account: Opening an IRA account at any number of Mutual Funds or brokerage houses is easy and cheap. The market is very competitive, and you should be able to find one with no fees. (The broker I use has no IRA fees, and no minimums)
+Not taxed upon withdrawal. Upon retirement you can withdraw the money tax free. This is the opposite of the other options. With the IRA and 401k, you save taxes on the way in, and pay taxes on the way out. With the Roth IRA you pay taxes on the money going in and pay nothing on the way out.
+Greater availability. Anyone with an adjusted gross income of 99,000, 156,000 if married (for 2007) is able to contribute to a Roth IRA.
+Liquidity. Unlike the other two retirement options discusses, the Roth IRA allows removal of funds without penalties in certain circumstances. This feature may not be desirable; one may be tempted to dip into retirement savings for short term needs.
+You are never forced by the government to remove money.
Adjusted Gross Income
(AGI) is generally the income amount you use for tax
purposes before subtracting itemized deductions.