Page 80 - Workbook3E

3. SEP IRA: Simplified Employee Pension: An employer established and funded IRA, where the employer can put up to a percentage of your compensation into a special IRA account. Sole proprietors may establish these plans for their own benefit. They’re sometimes used instead of Keogh retirement plans because they have fewer administrative and tax filing requirements.
4. SIMPLE IRA: It’s another employer sponsored and administered retirement plan. The attractive features of the plan include not only the ability for employers to establish and fund a retirement plan for themselves and their employees, but it also permits employees to contribute up to 100%, but no more than a maximum per year, into an IRA. Separate rules relative to required employer contributions and premature distributions apply.
5. ROTH IRA: Contributions are NOT deductible when the funds are contributed, but the Roth IRA earnings accumulate tax-free and remain tax-free upon distribution. When you’re retired and on a fixed income, you don’t have to worry about paying taxes on your withdrawals. To be eligible to contribute, your Adjusted Gross Income must be under $110,000 for singles and $173,000 for married couples, as of 2012. You can’t withdraw your funds within the first 5 years after the establishment of the Roth without a penalty. Given that, this 5-year testing period can successfully
be addressed by proper tax planning. The funding of a Roth IRA account should be considered by every taxpayer who qualifies for it.
6. 401(k): is a tax-deferred investment and savings plan that acts as a personal pension fund for employees. Usually made through payroll deductions and sometimes includes matching funds by your employer. Contributions are pre-tax, reducing your taxable salary. 401(k) plans are also portable. When you change jobs, you can roll over your account into another employer’s 401(k) plan or into an IRA. Most employers (over 80%) offer some type
of company match—both as an incentive for employees to join the plan and as part of the overall benefits package. The employer contributions are a real attraction of the 401(k) account. If your employer matches your contribution at 50 cents on the dollar, you’ve made an instantaneous 50% return.
Advantages to Consider
These retirement plans can help you in four ways: (1) Part of the income you put into these plans may not be subject to tax; (2) Money you withdraw may not be subject to tax—Roth IRA; (3) Interest or dividends earned by money put into these plans may accumulate tax free during your working years; and (4) You may be in a lower tax bracket when you start drawing income from these plans.
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76 Workbook 3: Prepare for the Future