Do You Insure the Goose that Lays Golden Eggs; or, Do You Insure the Eggs?

If you owned a goose that laid golden eggs and you could only buy one insurance policy, would you insure the goose or the eggs?  Most people are likely to answer this question by stating that (obviously) they would insure the goose.  So, let’s consider a variation on this question.

Have you thought lately about your most prized possessions; your most valuable assets?  Do you know what they are?  Most people are likely to answer this question by saying “yes” and then listing items such as houses, cars, boats, jewelry.  These things are valuable and that’s why people buy homeowners insurance, car insurance, and boat insurance.  However, let’s consider another asset that is, without a doubt, far more valuable than any of those things mentioned above … your ability to get out of bed each day and go to work and earn a living.

If you get sick or are hurt and incapable of working, how do you protect the paycheck upon which you and your family depend for food, shelter, water, electricity, and clothing?  Prudence dictates that we cannot rely upon the good will and charity of others to care for our loved ones.  That responsibility is ours and ours alone.  Surely there must be a way to protect ourselves and our families from this potential calamity!  Fortunately, there is!  It’s called Disability Income Insurance (DI for short).

DI pays a percentage of your income while you are unable to work due to accident, injury, or illness.  Generally speaking, that percentage is 60% to 70%.  People often ask why it doesn’t replace 100%.  After all, most people today rely on all 100% of their income to keep the bills paid and food on the table.  The reason is really very simple.  Consider a person we’ll call Mark.

Mark is one of those fortunate people who really enjoys his job.  He wakes up each morning with a smile on his face and looks forward to the interaction with others that his job provides.  That’s not to say that Mark doesn’t have hobbies and interests that he’d like to pursue.  Oh no!  There are days he’d love to go fishing if only he didn’t have to go to work.

Now, let’s suppose that Mark gets hurt one day.  It’s bad enough that he can’t do his job; but, not so bad that he can’t go fishing.  If Mark is collecting 100% of his income while he goes fishing, he has no real incentive to get better quickly.  But, if he’s only receiving 70% of his normal pay, he has a great incentive to recover as quickly as possible.

Disability insurance can be a very real financial life saver and should be a part of everyone’s financial protection portfolio.  In the days to come, we’ll take a look at key components that should be considered when purchasing Disability Income Insurance.

Help! I’m Retired and Can’t Afford to Run Out of Money!

My friend Jack’s widow called me recently and told me that her brother had died.  She still hasn’t finished settling her husband’s estate and now she’s responsible for settling her brother’s estate, too.  While going through her brother’s papers, she found that she would be receiving a significant sum of money from the sale of his property.

“Help,” she said.  I need to create an income that I can’t outlive.  This is all the money I’ve ever have.  I can’t take a chance that it will be gone before I am.”

I was happy to tell her that there is a way to create an income that will last as long as she does.  It is called an annuity.

An annuity is a contract issued by an insurance company that can turn a lump sum of money into a monthly income.  The person receiving the income is called the annuitant.  The annuitant can receive this income for as long as he or she lives; or, by using an option known as “life income with period certain”, can receive an income for a specific number of years or for life; whichever is longer.  Consider this example:

Mark and Martina recently retired after selling the business that they had owned for 30 years.  They planned to travel and see all of the sites that they had dreamed of visiting over the years.  Sadly, Mark suffered a massive heart attack and died.

Quite naturally, Martina feared that she might outlive the money that they had received from the sale of their business.  To ensure that this could not happen, she purchased an annuity from the Shifting Sands of Daytona Insurance Company.  However, she also wanted to make certain that, if she died in the near future, the money that was left from the sale of the business would go to her daughter.

Her insurance agent recommended that she create a lifetime income guaranteed for a minimum of 10 years.  The annuity would pay her a monthly income of $1,500.  If she died at the end of the second year of payments, the contract would pay her daughter the remaining eight years (96 months) of payments; $1,500 per month.  On the other hand, if Martina lives another 20 years, the annuity will pay her $1,500 per month for as long as she lives.  Martina cannot outlive the monthly income; but, the income could outlive her for the benefit of her daughter.

Clearly, annuities are not the perfect answer for every situation.  But, if Jack’s widow is concerned that she might outlive the money she receives from her brother’s estate, an annuity might be the answer to her concerns.


I met with “Susan” this week and asked if we could review the record she was keeping of what she spent her money on; her expense log.  She pulled a notebook out of her purse with some apprehension and quietly told me that it was “pretty embarrassing.”

Susan went on to tell me that she had been afraid to keep this record; that she feared it would make her look like a bad person because of what it revealed about her decision making.

She continued, “This morning, I reviewed my notes and they confirmed my worst fears.  I made a lot of really bad decisions.”

This is a very common reaction when people first begin keeping records of their spending and taking responsibility for how they manage their money.  They feel like the record they keep is full of bad news.  It was fun to tell her that the record is actually full of GOOD NEWS.

“Susan, your expense log may feel like bad news, but it’s really full of good news; and, here it is.

•    “First, you took a really big step in choosing to keep this record.  It took real courage and commitment.  It’s very important that you give yourself credit for taking this big step.

•    “Second, each of us has a personal board of directors in our minds.  Think of your board as those little voices that are always whispering “good choice”, “smart move”, or “ooo, you could have done better”.  This board is always looking at what we’ve done in the past and what we can do in the future with the goal of helping us do our best.  When you reviewed your expense log this morning, your personal board of directors expressed its disappointment in some of your spending choices.  As the CEO (Chief Excellence Officer) of yourself, you agreed with your board of directors and said, “yes, I could have done better”.  The GREAT NEWS is that you took a responsible step and decided that you wanted to make changes in your future spending decisions.

•    Third, the even GREATER NEWS is that your get to make your own plan for making those changes!”

By now, Susan was smiling as she realized that her fear of confronting what she thought was a real weakness had turned out to be a winning move as she took a big step toward financial independence.

Want the secret weapon that Susan used in this real life story?  Here’s what you can do …

1.    Identify three areas where you do not like the choices you have made about how you’ve spent your money.

2.    Set a goal of what you want future decisions to look like.

3.    Write down how you want to reach that goal.

4.    Promise yourself that you will make the changes that will enable you to reach this goal; and, continue to write down your expenses so that you can measure your progress.  (Bonus … if you just sighed and thought that this is too much work, take a second and write down just 1 thing you spent money on today.  Just one.  How long did that take?  Don’t let your emotions fool you into overestimating how much time this will actually take.)

5.    Set a date when you will review this record and decide if you have reached your goal.

Susan left our meeting with renewed confidence that she could control her money rather than have her money control her.

Ironically, the effectiveness of this process is not confined to personal finances.  It can be applied to all aspects of life.  Our internal board of directors is always conducting an on-going performance review … looking at our goals (or lack of goals), the plans we’ve created for reaching those goals, the progress we’ve made toward the attainment of the goals, and rendering a judgment every day; exceeds expectations, satisfactory, or unsatisfactory.  When we receive the board’s daily verdict, we choose how to respond.

•    We accept the accolades for a job well done and vow to keep up the good work;

•   We take credit for the accomplishments and responsibility for the shortcomings and make a plan for improving performance where it is needed; or,

Well, the third choice is giving up; but, that is not an acceptable choice.  The board of directors is not an external body that we can choose to ignore.  Rather, it is a living, breathing, part of who we are and it will always be whispering in our ear.  It cannot be disregarded.

Has your board of directors conducted today’s review? If it has, you know what you want to work on.  If not, there is still time to make today’s review a favorable one.

So, You Want to Have Your Retirement Cake and Eat It, Too!

Last month, we saw how Jack’s wife faced an uncertain economic future following his death because of the retirement income choices he had made with the expectation that he would outlive her.  Unfortunately, Jack’s plans did not work out as he expected.

We also saw that his employer had provided options that could have allowed his widow to have an income if she outlived him; but, these choices would have caused them to have a significantly lower monthly retirement income.  What Jack really wanted was a plan that would allow him to have his cake (the maximum monthly retirement income) and eat it (the maximum retirement income for his widow), too.

Knowing Jack, had he been told that such a plan existed, he would probably  have responded that when it sounds too good to be true, it isn’t true.  What Jack did not know was that such a plan does exist and it is not too good to be true.  The plan is often referred to as “Pension Maximization”.

Let’s assume that Jack’s options are as follows:

•    Life Income – this option pays the highest monthly income at his retirement; BUT, that income ends when he dies.  We will assume that this option provided an income of $1,000 per month.

•    75% Partial Benefit – Jack will receive a monthly pension of $750 per month.  At his death, his wife would continue to receive a monthly check in the amount of $250.

•    50% Partial Benefit – Jack will receive a monthly retirement income of $500.  At his death, his wife would continue to receive the same $500 per month.

Pension Maximization allows Jack to choose the Life Income option with a contractual guarantee that his wife will receive a lump sum of money that can be used to create a monthly income.  How can Jack do this?  He can do this through the miracle of life insurance.  Here’s how it works …

Jack will purchase a life insurance policy with a death benefit that, when invested conservatively, will generate a $1,000 per month income for his wife.  To determine the required death benefit, Jack will divide the annual income goal ($12,000) by the interest rate that can be obtained on a conservative investment (for simplicity, we will assume a 5% interest rate).  Expressed as an equation, it looks like this …

12,000 / .05 = 240,000

This equation tells us that Jack will need to purchase a $240,000 life insurance policy.  At his death, his wife takes the lump sum of money and places it into an investment that yields 5% interest.  This will then give her the same monthly income that they enjoyed while Jack was alive; and, if she never invades the principle, will provide a legacy that she can pass on to their children when she dies.

The key to Pension Maximization is to plan ahead.  The younger a person is when they start this plan, the less the life insurance costs.  To demonstrate the difference that starting early can make, I checked with an A+ (Superior) rated life insurance company and found that if Jack, a non-smoker in good health, had purchased a $240,000 whole life policy at age 45, his monthly premium would have been $325.015.  Had he waited to purchase the policy until age 65 and assuming that he was still in excellent health, he’d have paid $780.42 each month.  Clearly, planning ahead offers tremendous advantages.

What Do You Mean I Don’t Get My Husband’s Retirement Anymore?

I got a call last month from the wife of my friend “Jack” telling me that Jack had died; and, asking if I could help her with making sense of his affairs.  She felt overwhelmed.  Jack left no will and she was learning that she was in for a rough financial road ahead.  She was afraid that she might not have enough income to remain in her home.
Jack worked hard all of his life; made what he believed were good choices.  To ensure that he and his wife could really enjoy their golden years, he took the highest income possible from his retirement, a “lifetime” income, so that they could travel; see and do things that they’d always dreamed of.  Little did he realize that in doing so, he was sowing the seeds for a financial problem for his wife!
Last week, Jack’s wife got a letter from his former employer informing her that, because he had selected a “lifetime” income from his retirement plan, the monthly retirement check he’d been receiving was being terminated.  The income had been provided for his lifetime only and ended at his death!  While it had provided them with a very generous income while he was alive, she would receive nothing in the future!!  Needless to say, she was both shocked and afraid.  She wanted to know why Jack’s employer had not given him other income options.  What she did not realize was that they had.  Because his wife had been undergoing health issues at the time of his retirement, he never anticipated that she would outlive him.  Consequently, he made his selection in the belief that he was making her last years as full and enjoyable as possible.  He always anticipated that he could fend for himself when she was gone.
Retirement plans offer various choices as to how income will be received; and, people can plan for retirement well ahead of their last year of work.  Let’s take a brief look at the options Jack had in his retirement plan and how a different selection might have provided an income for his wife following his death.
• Life Income – this is the option Jack chose.  It pays the highest monthly income at his retirement; BUT, as his wife learned, that income ends when he dies.  To illustrate the other options, we will assume that this option provided an income of $1,000 per month.
• 75% Partial Benefit – had Jack elected this option, his monthly income would have been reduced by 25%.  Consequently, he would receive a monthly pension of $750 per month.  At his death, his wife would continue to receive a monthly check in the amount of $250.
• 50% Partial Benefit – by choosing this option, Jack would have agreed to receive a monthly retirement income of $500.  At his death, his wife would continue to receive the same $500 per month.
• Lump Sum Benefit – At first glance, it’s easy to ask how taking a lump sum payment would have enabled Jack’s wife to receive an income after his death.  However, the fact is that this money could have been invested in a manner (i.e., a portfolio of dividend paying stocks, interest paying bonds, or an annuity) that would create an income for them both.
Each of these  options has advantages and disadvantages; and, no option is perfect for all situations.  When planning for retirement, it’s important to examine all options and carefully consider how each option might impact you and your loved ones.


While discussing the difference between saving and investing, it was suggested that “risk” influenced where the money was “stored”.  So, let’s explore what risk is.
Simply stated, when talking about investing, risk means that the asset could lose value … that it would not be sufficient to pay what it is needed for.  But, simple never really tells the whole story, does it?  For this reason, let’s take a little deeper look at the kinds of risk that an investor has to face.
•        Credit Risk – also known as default risk, this is the possibility that someone to whom money has been loaned will not be able to repay the debt as promised.  This risk is most common when someone has purchased bonds.  Example:  you have loaned money to a friend.  When the day on which the loan was to be repaid, your friend tells you that he/she does not have the money and cannot repay you as promised.
•        Interest Rate Risk – this is another risk faced by someone who has purchased a bond.  It is the risk that the lender has tied up his or her money in a loan paying a low interest rate and, when interest rates rise, the lender will not have that cash available to lend at the higher, more profitable, interest rate.  Example:  you have loaned money to someone at 5% interest.  This was all the money you had available to loan.  Now, someone else approaches you and states that, if you will loan them money, they will pay you 6% interest.  Since this would be a profitable business deal, you would like to make the loan.  However, you have not yet been repaid by the first borrower so you are unable to make the more profitable loan.
•        Market Risk – this risk can be faced by someone who has either invested in stocks or bonds.  It is the risk that you will not be able to sell something for at least as much as much as you bought it for; or, the item cannot be sold at a profit.  Example:  you bought an asset for $5,000 and, now, no one will pay you more than $4,000 for that same item.
•       Liquidity Risk – this risk can affect anyone who buys any asset; stocks, bonds, real estate, any asset.  This is the risk that your asset cannot be turned into cash when cash is needed.  Example:  ten years ago, you purchased trading cards that you hoped would go up in value.  Today, you find out that these cards are no longer considered valuable and no one will buy them from you.
•       Inflation Risk – this may be one of the most insidious risks people face because it means that money won’t buy as much in the future as it buys now.  Example:  imagine that you had a $100 bill ten years ago.  Because you knew that you would need it and could not afford to lose it, you had it sealed in a can and buried it in the back yard.  You clearly marked the point where it was buried and guarded it to ensure that no one dug it up and stole it from you.  To understand the impact of inflation risk, ask yourself how many bags of groceries you could have purchased with that $100 bill ten years ago; then, ask how many sacks you could fill with that same bill if you took it to the store today.
Clearly, there are different kinds of risk and there are steps that can be taken to protect yourself against those risks.  Managing risk is a topic that we will explore in another article.

Saving vs Investment

In all of the financial counseling sessions I’ve conducted; and, in all of the personal finances classes I’ve taught, the subject of saving inevitably comes up.  While discussing the importance of “saving for a rainy day”, one class participant asked me to explain the difference between saving and investing for the future.

Both involve deferred consumption … not spending money today so that it is available for use at some unspecified time in the future.  So, what does differentiate one from the other?  I believe that the distinction is found in two things … where the money is kept and the amount of time that is expected to elapse before the money will be used.


Let’s talk about time as it relates to where we keep our money.  Saving usually implies that the money will be needed in a relatively short period of time; for example, saving money for a new refrigerator or for a new set of tires for the car.  Both examples imply that the money will be needed relatively soon, possibly within the next year or so.  Since the money will be needed soon, it must be kept where it can be accessed quickly and easily; it must be a liquid asset.  Since it will be needed soon, the saver cannot take risks that might lead to less money being available than will be needed; the asset cannot be subject to possible depreciation.  For these reasons, some assets are far more suitable for savings than other assets.

Cash is certainly an asset that can be kept in a variety of locations.  It can be kept in grandma’s old sugar bowl or under the mattress.  Unfortunately, these carry the risk that the funds may be stolen since neither location is secure; and, sadly, there is no way these funds can grow since they earn no interest.

Suitable places to keep savings include savings accounts, money market funds, and certificates of deposit (CD’s) at their local bank or credit union.  All three are low risk; i.e., the value of the account cannot go down.  All three pay interest with CD’s paying a somewhat higher interest rate in return for the depositor’s promise to leave the money untouched for a specific period of time.  All three are designed for the short-term storage of money.  This is why they are good for saving.


Investing, by its nature, carries risk … the chance that the value of the asset might decrease … risk that there may not be enough money when it is needed.  There are many kinds of risk which will be discussed in another article.  For now, suffice it to say that the risk of loss makes many investments unsuitable for short-term financial needs.

Investments such as stocks, bonds, mutual funds, real estate, and real estate investment trusts (aka REIT’s) are much better suited to long-term financial goals.

Planning For Retirement – Part 5 … 403(b)’s

As we saw in Part 4, a 401(k) plan allows people who work for large companies to reduce their taxable income by having money deducted from each paycheck and invested in a retirement plan.  That’s all well and good if you work for a “for profit” company, right?  But, what if you work for a 501(c)(3) non-profit organization; or, you work for a non-profit hospital; or, a church; or, you work in the public school system?  Good news … there’s a plan designed specifically for YOU!

Known as a 403(b) plan or a Tax Sheltered Annuity (TSA), this plan functions much like a 401(k) or an IRA.

  • Like a 401(k), the 403(b) plan reduces the amount of money on which you will pay federal income taxes.  You will, however, still be required to pay social security and medicare taxes on this income.
  • Depending on your adjusted gross income, you may be eligible for a $1,000 ($2,000 if filing jointly) Retirement Savings Contribution Tax Credit when you contribute to a 403(b) or 401(k) plan.
  • Like money in a 401(k) or IRA, you will not pay taxes on your contributions or the growth and earnings on those contributions until you withdraw the money from the plan.
  • The maximum contribution to a 403(b) plan is $17,000 in 2012; and, if you are age 50 or older, you can contribute an additional $5,500 under the “catch-up” provision.
  • Because this plan provides a tax-sheltered environment in which your investments grow, you will be subjected to the same taxation and penalties if money is withdrawn from the plan prior to age 591/2; and, just like the IRA and 401(k) plans, you must begin taking annual minimum distributions from the plan at age 701/2.
  • Just like a 401(k), you cannot establish your own 403(b) plan.  These plans must be established by your employer.

While these plans are often referred to as Tax Sheltered Annuities (TSA’s), you have options regarding where and how the money can be invested.

  • As the name implies, money can be invested in an annuity or variable annuity contract issued by an insurance company.
  • Alternatively, the money can be invested in a custodial account made up of mutual funds.  This is known as a 403(b)7 plan.
  • Churches can establish retirement income accounts under section 403(b)9.

Contributions that you make into your 403(b) plan are always yours although you may be subject to a surrender charge if you terminate an annuity contract within a specified number of years after it was issued.  If your employer makes any matching contributions, they may be subject to a vesting schedule similar to the vesting schedules in a 401(k).

403(b) plans offer yet another great way for qualifying workers to plan for retirement through the use of payroll deductions.  If you work for a 501(c)3 non-profit agency, church, hospital, or in the public school system, check out this great plan … someday, you’ll be very glad to have the extra retirement income that these plans can provide.

Planning For Retirement – Part 4 … 401(k)’s

In Part 1 of this series, we briefly discussed how retirement planning had changed from the days when Joe went to work for The Big Company.  Back then, the company provided a pension plan that paid Joe a retirement income based on how many years he’d worked for the company and how much he made while he worked there.  Today, his grandson, Joe3 works for a company that offers a 401(k) plan rather than a pension.  But, how does the 401(k) work?

A 401(k) plan has much in common with an IRA.  Like an IRA, the 401(k) allows Joe3 to reduce his taxable income by contributing money into the plan.  Joe3 directs his employer to deduct a specific amount of money from each paycheck.  These untaxed funds are invested in accordance with instructions that Joe3 provided when he authorized the deductions.  The growth of the investments is not taxed until such time as Joe3 takes money out of the account.

Because this is intended to serve as his retirement plan, Joe3 is expected to leave the money in the account until he is at least 591/2 years old.  If he withdraws money from the account before that age, he will pay ordinary income taxes on the money withdrawn; and, he will pay a 10% penalty for the premature withdrawal.

One of the real advantages of the 401(k) plan is the ability to contribute far more to the plan than is permitted for an IRA.  While the maximum contribution to the IRA in 2012 is $5,000, an individual can contribute up to $17,000 into the 401(k).

Another advantage is that this plan allows an individual to reduce his or her taxable income regardless of annual income.

Moreover, because the 401(k) plan entails regular, consistent, investments, the individual is able to take advantage of the concept of “Dollar Cost Averaging”.  Dollar Cost Averaging simply means that the purchaser buys more shares when prices are low and fewer shares when prices are high.  Consider this example.  Joe3 has decided to invest $100 each month in stock issued by the XYZ Company.

Month Price Per Share Total Shares Purchased
January $10.00 10
February $5.00 20
March $20.00 5
Total $300.00 35

As can be seen, Joe3 has invested a total of $300.  If he decided that he wanted to sell all of his shared in the XYZ Company, how much would he have to sell them for in order to make money; $5, $10, $20, or something else?  If we divide his $300 investment by the 35 shares he owns, we can see that he paid an average of $8.57 per share; thus, he’ll make money if he sells the entire investment for more than $8.57 per share.  Of course, this does not include any fees that he may have to pay when selling the shares.

Now, let’s extend this concept into Joe3’s 401(k) program.  If Joe earns $500 per week and directs his employer to deduct 10% ($50) from each check and place that money into his 401(k).  When prices are high for Joe3’s chosen investment, he will buy fewer shares at the high price.  When prices are low for Joe3’s investment of choice, he’ll get more shares.  At his retirement, Joe3 will have amassed a significant retirement account that he can convert into a regular monthly income to support him in his golden years.

One final potential advantage should be recognized here.  Some companies provide some type of matching contribution to an employee’s 401(k) contribution.  Joe3’s company contributes $0.50 (fifty cents) for every dollar that Joe3 puts into his 401(k).  This represents an immediate 50% return on his investment so longs as Joe3 remains with the company long enough to “vest” that matching contribution.

Companies have a choice in vesting schedules; specifically, that matching contribution becomes the employee’s money when one of two schedules has been met.

  • “Cliff Vesting” – the entire matching contribution becomes the employee’s property after 2 years of employment.
  • “Stair-Step Vesting” – the matching contribution becomes the employee’s money in increments; i.e.,
    • 20% of the matching contribution belongs to the employee after 2 years of employment;
    • 40% of the matching contribution belongs to the employee after 3 years of employment;
    • 60% of the matching contribution belongs to the employee after 4 years of employment;
    • 80% of the matching contribution belongs to the employee after 5 years of employment; and,
    • 100% after 6 years of employment.

Some employers measure the beginning of the vesting period from the initial date of employment while others measure it from the date on which the matching contribution was made by the company.  Of course, the employee’s contributions to the plan always belong to the employee and cannot be taken away (which is not to say that the value is always the same … the value can increase or decrease based on the performance of the investment that the employee has chosen).

Just like the IRA, Joe3 must begin withdrawing money from his 401(k) by the time he turns 701/2.  Failure to make the minimum annual withdrawals will result in the assessment of tax penalties.

401(k) plans offer employees a great way to plan for retirement through the use of payroll deductions (if you don’t see the money, you don’t miss the money) and growth within a tax sheltered environment.  If your employer offers this type of retirement plan, check it out … someday you’ll be very glad you took advantage of the opportunity to plan for your future retired life.

NEXT UP … 403(b)

Planning For Retirement – Part 3 … ROTH IRA’s

The ROTH IRA is perhaps one of the best tax advantaged retirement plans available to the individual taxpayer today.  Created in 1997 by the Taxpayer Relief Act, the ROTH IRA is similar to a traditional IRA in that it allows individuals to save for retirement in a tax sheltered environment; i.e., the earnings and growth within the account is not taxed.  However, there are some significant differences.

  • Contributions are not tax deductible.  All money put into a ROTH IRA is “after tax” money.  You’ve already paid income taxes on it.  While this may initially sound like a disadvantage, it proves to be a real advantage when it comes time to withdraw funds from the account.
  • Withdrawals from the ROTH IRA after age 591/2 are tax free.  That is huge!  Where all withdrawals from a traditional IRA are subject to federal income tax, both the principal and the growth are untouched by the tax man when they are withdrawn from the ROTH IRA.
  • There are no minimum annual withdrawals required from a ROTH IRA after age 701/2.  For someone who does not necessarily “need” the money from their retirement fund and who wants to leave it as a legacy to a family member, this allows the money to continue growing in the tax sheltered environment.
  • Where the traditional IRA prohibits any additional contributions after age 701/2, a person can continue to contribute money into his or her ROTH IRA so long as he or she has income.
  • Earnings can be withdrawn without federal tax penalties when the funds will be used for:
    • expenses for a post-secondary education (i.e., college or accredited trade or technical school
    • health insurance after a long period of unemployment
    • periodic payments such as credit card debt
    • catastrophic medical expenses
    • payment on a levy
    • If the money has been invested for five taxable years, earnings can be withdrawn tax-free if the individual:
      • has reached the age of 591/2
      • has become disabled
      • is using the money for a first-time home purchase
      • has died

One final note regarding withdrawals from a ROTH IRA is in order.  If the ROTH IRA owner dies and the spouse is the beneficiary, the spouse has the right to roll the money into his or her own ROTH IRA or postpone taking payments based on projected life expectancy until the owner would have been 701/2.

The ROTH IRA has the same contribution limits as the traditional IRA discussed in Part 2, including the availability of the “catch-up contributions” if the person is over the age of 50.

Because the ROTH IRA empowers us to accumulate money in a tax-sheltered environment and permits tax-free withdrawals in retirement, this may well be one of the very best retirement planning options available to U.S. taxpayers today.  If you haven’t looked into this great plan, you might want to do so today!

NEXT UP … 401(k)’s