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Different types of retirement accounts provide you with different ... Individual Retirement Accounts, or IRAs, are special accounts with tax advantages to help ...

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Presentation Transcript
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Bell Ringer

  • What is your dream retirement? - Describe it in as detailed a fashion as possible, including a guesstimate as to how much money you’d need


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Retirement

February 16, 2006


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It’s never too early…

  • Starting to properly plan for retirement begins with asking the most basic of questions: What type of account do you want to open?

  • Your answer is critical—so critical that it can affect your whole retirement picture in the future.


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Different Options

  • Different types of retirement accounts provide you with different ways to deposit money, invest money, keep the money earned, and even to use the money you accumulate. So be sure to consider the differences among the types of accounts and choose the one(s) that work best for you.


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IRA’s

  • Individual Retirement Accounts, or IRAs, are special accounts with tax advantages to help you save for retirement.

  • There are two types of IRAs:

    • Traditional IRAs

    • Roth IRAs


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Traditional IRAs

  • Traditional IRAs allow you to save money without paying taxes until you withdraw it. The money you put into the IRA can lower your taxable income and grows tax-free while it's in the IRA account.


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What is it?

  • The IRA is not an investment itself. It's an account into which you invest your money. You can invest the money you contribute in stocks, bonds, bank CDs, mutual funds, and other investments, including real estate. Pick investments that match your retirement goals.


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How does the IRA work?

  • You can have an IRA and a retirement plan at work, but you may not be able to deduct your IRA contributions on your tax return.

  • You can contribute up to $4,000 of your earned income annually. This amount is increasing each year.

  • If you're married and both you and your spouse earn income, you can both contribute to the maximum.


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Eligibility

  • Anyone who earns income is eligible for an IRA.

  • Kicker: All workers must be under age 70 1/2 at the end of the calendar year


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How/When to Contribute

  • You can write an annual check to your IRA for the maximum contribution.

  • You can make small contributions to an IRA throughout the year.

  • You can't contribute any more money to your IRA after you reach age 70 1/2.


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How does my money grow?

  • A great feature of an IRA is that you won't pay taxes on the money earned from investments until you withdraw the money from the account.

  • Because your money grows tax-free in an IRA, don't invest in something that already grows tax-free in a regular account.


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Taking out the money( Distributions)

  • When you reach age 59 1/2, you can begin withdrawing money for any reason without a tax penalty, but your earnings will still be subject to income taxation.

  • Once you reach 70 1/2, you'll have to take at least a minimum withdrawal from your IRA each year. Distributions-withdrawals must begin starting April 1 the year after you turn 70 1/2. If you fail to take distributions by that time, you will be taxed at a 50% rate on the amount that should have been withdrawn.


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Roth IRAs

  • Roth IRAs offer a slight twist on the traditional IRA. There are differences in the tax advantages and who can open a Roth IRA. The most attractive part of Roth IRAs is that your money is withdrawn without paying federal taxes.


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Tax Free!

  • Money that you put into a Roth IRA grows tax-free.

  • Because your money grows tax-free in an IRA, don't invest in something that already grows tax-free in a regular account.


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How is a Roth different?

  • Unlike traditional IRAs, you can't deduct contributions to a Roth IRA from your income taxes.

  • Instead, you contribute money that has already been subject to taxation. You can contribute up to $4,000 (non-deductible) a year of earned income into the account.

  • If you're 50 or older, you can also make an additional "catch up contribution" of up to $500 (it will go up to $1,000 in 2006).


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Roth Rules

  • You can contribute to a Roth IRA as long as you have income from work or alimony.

  • Your annual contributions are not tax-deductible (as they would be if contributed to a traditional IRA)

  • No matter how old you are, you can keep contributing money to a Roth IRA as long as you earn income.


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Eligibility

  • No age restriction to open a Roth

  • To qualify for the maximum Roth contribution in 2005, your modified adjusted gross income (AGI) must be less than $95,000.

  • If it's between $95,000 and $110,000, you will qualify for partial contributions.

  • For married couples filing jointly, their modified AGI must be less than $150,000


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Roth Withdrawals (Distributions)

  • A great feature of Roth IRAs is that you can withdraw contributions tax-free, once you have the account for 5 years and are at least 59 1/2 years old.

  • Unlike a traditional IRA, however, you aren't required to withdraw money from the account (or pay additional taxes) once you turn 70 1/2.

  • In other words, the account can be held until death and passed on tax-free to a spouse, children, or other heirs.


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Processing

  • For homework, compare and contrast a traditional IRA vs. a Roth IRA. Make a T-chart comparing and contrasting these components:

    • Eligibility

    • Contributions

    • Tax Benefits

    • Distributions


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Bibliography

  • www.AARP.com

  • The Money Book for the Young, Broke, and Fabulous by Suze Orman


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Retirement Accounts at Work

  • As traditional pensions are becoming less common, more and more employers are offering workers the opportunity to save with retirement accounts.


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Common Types of Plans

  • 401(k) plans—private companies

  • 457 plans—public and non-profit sectors

  • 403(b) plans—education and non-profit sectors

  • While there are some differences, they operate in similar ways.


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