You are here: Home / Financial Planning

Planning For Retirement – Part 2 … Individual Retirement Accounts (IRA’s)

February 6, 2012 By

Basic Information

The creation of Individual Retirement Accounts was included in the Employment Retirement Income Security Act (ERISA) of 1974.  This law empowered individuals to create their own retirement program by contributing money (at that time, the maximum contribution was $1,500) into a special account that would grow on a tax-deferred basis; and, the contribution to this account would reduce the individual’s taxable income for the year in which it was made.  Tax-deferred growth was, and continues to be, one of the greatest advantages offered by an IRA.

Originally, these plans were restricted; meaning, only those people who did not have any type of employer sponsored retirement plan could participate.  But, over the past 37 years, numerous changes have been made to the IRA.  Today’s IRA can be used by any individual; but, there are qualifications that determine how the plan can be used to reduce taxable income.  To see how the plan works, we’ll examine several different scenarios.

Janice works for an employer that provides no retirement plan of any sort to its employees.  Because Janice has no access to a qualified retirement plan, she can contribute up to $5,000 to her IRA and her full contribution can be deducted from her taxable income.  Thus, if Janice makes $40,000 this year and she contributes the maximum amount into her IRA, she will immediately reduce her taxable income to $35,000.

Todd has a qualified retirement plan available to him through his employer.  Because he is eligible to participate in this plan, Todd has some restrictions on tax deductibility of his IRA contributions.  If Todd’s modified adjusted gross income (MAGI) is less than $58,000, any contributions he makes into an IRA will be fully deductible.  If his MAGI is over $68,000, his contributions will not be deductible.  If MAGI is between these two amounts, his contributions will only be partially deductible.

Loren is 60 years old.  Because he is over 50 years of age, the law allows him to contribute up to an additional $1,000 to his IRA under what is referred to as the “catch-up” provision.  The deductibility of this additional contribution is subject to the same standards as both Janice and Todd.

The limits to modified adjusted gross income for married couples are higher; and, the availability of a qualified retirement plan to both or either person will impact the deductibility of the contributions.

The Advantage of Tax-Deferred Growth

Let’s assume that Josh invests $5,000 into his IRA every year, beginning at age 35.  After 30 years, Josh is age 65 and has made a total investment of $150,000.  We’ll also assume that he earns the same 8% return on his investments every year.  Finally, we’ll acknowledge that Josh is in the 25% marginal tax bracket.  Let’s see how his money would grow.

Total Contribution IRA Value Non-IRA Value
$150,000 611,729.34 $314,256.29

Now, let’s assume that, at age 65, Josh takes all of the money from his account in one lump sum.  How will taxes impact his retirement?

Total Contribution IRA Value Non-IRA Value
$150,000 611,729.34 $314,256.29
Taxes Owed on Withdrawn Amount $152,932.34 0
Total Spendable Funds $458,797.01 $314,256.29

Obviously, I think that we will agree that Josh is better off with the after-tax value of his IRA than he would have been had his account been subject to taxation for the entire 30 year period!  You can use a number of different financial calculators that are available on-line to see the advantages of tax deferral in your own specific circumstances.

Withdrawal of Money

As shown above, funds in an IRA are subject to federal income tax when withdrawn from the account at or after age 65.  But, if those funds are withdrawn before age 65, the proceeds are not only subject to income taxation, a 10% penalty will also be collected for a “pre-mature” withdrawal!  While there are some circumstances under which the 10% penalty will be waived, clearly, these accounts are intended to be left untouched until retirement.

Next up … ROTH-IRA’s

Filed Under: Financial Planning, Money Management, Personal Finances, Retirement Planning, Saving Money

Planning For Retirement … the ultimate level of unemployment – Part 1

January 29, 2012 By

Long ago and far away, in a time and place where cars sported lots of chrome and fins, the head of household (we’ll call him Joe) got out of bed each morning and went to work at The Big Company, Inc.

Joe started working at The Big Company right out of school and it was understood that he would work there for his entire career.  When he retired, The Big Company’s pension plan would send Joe and his wife a pension check each month that would allow them to enjoy their golden years with some degree of comfort.  The Big Company accepted the responsibility for investing the right amount of money each year to ensure that Joe’s retirement (along with the retirement of all of Joe’s fellow workers) would be safe and secure.  Joe could count on that pension check arriving like clockwork each month and he could never outlive that income.  That’s just the way things worked “back then”.

Today, Joe’s grandson (affectionately called Joe3 by family members faces a much different employment future.  The Big Company (TBC) no longer offers its employees a pension plan.  Instead, TBC invites its employees to contribute money into a Qualified Retirement Plan.

This Qualified Retirement Plan allows TBC to deduct money out of Joe3’s paycheck each week.  Joe3 decides how much will be taken from the check and how that money will be invested.  While TBC makes sure that there are many options for Joe3 to choose from, Joe3 is responsible for selecting his investments and monitoring them from month to month and year to year to make certain that he sufficient money to fund his own retirement.  If he plans well and the investments perform well, Joe3’s retirement should be safe and secure.  If he fails to put enough money into the plan; or, if the investments don’t perform as well as he had hoped and he has too little to retire on … oh well, that’s Joe3’s problem and TBC has no responsibility or culpability for the shortfall.

Since it’s Joe3’s responsibility to make sure he has enough money when he retires, we’re going to take a look at the different plans that Joe3 can choose from; the opportunities that those plans offer and the limitations that are included in those plans.  In Part 2, we’ll look at one of the most prevalent Qualified Retirement Plans … IRA’s

Filed Under: Financial Planning, Money Management, Personal Finances, Retirement Planning, Saving Money, Saving Money

What Your Family Needs to Know When You Die (Part 5)

January 26, 2012 By

In the days and weeks following your death, your family will be looking for information about any benefits to which you and they are entitled.  You can make this search easier for them by providing the following information for them.

  • Group Insurance Benefits – if your employer provides group life insurance, let your family know the name of the insurance company and who the primary contact person is at work.  This will probably be someone in the Human Resources (HR) Department who will be able to help your survivors file the necessary paperwork to collect the benefits provided by the group policy.
  • Individual Life Insurance Benefits – there once was a time when employees remained at the same employer for their entire working lifetime and that employer’s group benefits could be counted on to help the employee meet all of his or her needs.  That is no longer the case.  While I would never tell a person to refuse the insurance that the employer is paying for, I would also encourage that person to have life insurance that he/she owns and controls; life insurance that will stay with him/her when they are no longer a part of the group.  Once again, make sure your family knows the name of the insurance company that you have purchased life insurance from, the name of the agent from whom you bought it, and the address/telephone number of the company’s home office.  Keep the policy in a safe place (i.e., a fireproof lockbox) at home.  Many people believe that the policy(ies) should be kept in the safe deposit box at the bank; but, if the bank learns of the death before your beneficiaries get the policy out of the box, that box can be sealed until it has been “inventoried” for estate tax purposes
  • Any associations to which you belong that may provide benefits – many associations and professional organizations offer benefits to survivors as a benefit of membership.  Make certain to list out all organizations to which you belong and any benefits that your know they provide along with contact information for each one so that your survivors can easily claim those benefits.
  • Homeowner’s/Renter’s Insurance and Auto Insurance – the name, address, and contact information for your agent along with the name of the insurance company and its home office address and telephone number should be listed along with the information regarding individual and group life insurance policies

The days and weeks after your death will be a difficult time for your survivors.  You have the ability to make this time a little less trying for them by planning ahead and making certain that they know where the plan details can be found and who to contact for help in putting that plan into action.  There are few love letters that you can write to your family that will be more appreciated than the one that begins, “I know this is hard for you, but I’ve done all I can to make it a little easier for you …”

Filed Under: Financial Planning, Personal Finances, pre-need planning, what my family needs to know, what my family needs to know

What Your Family Needs to Know When You Die (Part 4)

December 9, 2011 By

The assets you listed in the last installment are only half of your personal balance sheet that your family will need when you are gone.  The other half are your liabilities … the debts you owe to others.

  • Mortgage – for most families, the mortgage on the family home will be the largest debt that is owed.  Your family will need to know the name of the mortgage lender and its address; the loan number; and, the current balance owed on the loan.  If there is more than one mortgage on the property, be sure to list any other lenders and the appropriate account numbers.  Be sure to list the monthly payment that is due on each mortgage.

This would also be a good place to list any life insurance policies that you may have purchased to provide the funds to pay off the outstanding mortgage(s).

  • Auto Loan(s) – provide your family with the name of the lender along with the lender’s address; the account number; the current balance owed on the loan; and, the monthly payment that is due.  If you have purchased any loan cancellation insurance, you should list it here including the name of the insurance company, its address, and any person with whom you regularly have contact.

You should also list here the name of the company that insures your vehicle(s) along with the name of your agent and the policy number so that the company can be notified of your death.

  • Credit Cards and Personal Loans – in a perfect world, no money would be owed on unsecured debts.  However, few of us live in “Perfect World, USA” so list all of your personal/signature loans, credit card accounts, addresses for each account, the account numbers, and a current balance on the account.  Also, indicate where you keep your current statements and balances owed on each account.

A person’s death does not wipe out any debts that are owed.  Creditors have the right, and they will exercise it, to make demands for payment against your estate.  Sadly, there are some who will attempt to take advantage of survivors’ grief and confusion to make money by making claims against the estate for debts that do not exist.  By leaving a clear inventory of debts owed, you can protect your family against these bogus claims.


Filed Under: Financial Planning, Money Management, Personal Finances, pre-need planning, what my family needs to know, what my family needs to know Tagged With: , , ,

What Your Family Needs to Know When You Die (Part 3)

November 28, 2011 By

When you are gone, your family will need to know a great deal about your personal finances.  They’ll need to know about your assets and your liabilities.  Today, we’ll look at assets.

Assets are the things you own that have value; perhaps generate income that can be used to support your dependents.  Your family will be helped tremendously if you assemble an inventory of your assets.  Consider the following …

  • Bank and Credit Union Accounts – do you have a checking account; savings account; certificate(s) of deposit; safe deposit box?  If you have any of these assets, list the name of the financial institution along with its address; account number(s); and, the name of the individual with whom you most frequently do business.
  • Stocks, Bonds, and Mutual Funds – if you have investment accounts, your family will need to know what assets your accounts hold; i.e., the names of any individual stocks, bonds, or mutual funds you own along with the name of the Registered Representative and firm with which you do business.
  • 401(k) – if your company offers a 401k … other qualified retirement plans include 403(b) plans, tax-sheltered annuity plans, and 457 deferred compensation plans … be sure to include the name of the plan administrator with the administrator’s address and telephone number; the name of the person at work who is your primary contact regarding the plan; and, a recent statement showing how the funds are invested and current balances.
  • Real Estate – obviously, the first item on this list would be your house.  Be sure to include a current estimate of the property’s value.  You can obtain a current value from a Realtor; or, do an on-line search by typing in the question “what is the current value of my house”.  Your search should yield a number of websites that will help you estimate its current market value.

The list of assets above is certainly not all-inclusive.  You may own art, collectibles, firearms, jewelry, and many other things.  Be sure to include these items in your list of assets along with their current market value.  If these items have been professionally appraised, include the most recent appraisal.

The days, weeks, and months following your death will be trying times for your family.  They will be grateful for any help you provide for them that will help them put together the financial pieces of their lives.

Filed Under: Banking, Checking Accounts, Financial Planning, Money Management, Personal Finances, pre-need planning, Savings Acounts, what my family needs to know, what my family needs to know Tagged With: , , ,

What Your Family Needs to Know When You Die (Part 2)

November 16, 2011 By

In the hours following your death, your family will be called upon to make several important decisions.  While no one likes to contemplate their own demise, family members will be grateful for any and all help you can give them in this emotionally trying time.  One of the greatest gifts that you can bequeath to your family is making your wishes known before the need arises.

  • What funeral home should be called to come and get your body?

In the minutes after your death, your family may be asked to schedule the immediate pick up of your body by mortuary.  If your death was sudden and unexpected, an autopsy may be required to determine the cause of death.  A post-mortem exam will delay the decision; but, eventually, the family will have to provide a response to this question.

While most funeral homes are honest and reputable, stories about unscrupulous establishments and their staff members preying on the bereaved family abound.  Establishing a working relationship with a trusted mortuary during your lifetime will spare your family this emotionally trying experience.

  • Do you want to be cremated or buried?

Every individual has his or her own personal beliefs on this subject.  If you have a preference, let your family know.  Tell someone … leave written instructions.  You can engage in what is known as pre-need planning and make these arrangements now; while you are healthy and have the ability to think in a clear, rational, and unemotional way.

  • Do you want a funeral/memorial service to be held?

A very close friend recently lost his father.  He told me that the greatest thing that his father had done for his mother was meeting with the local funeral director several years ago and plan everything that he wanted done.  When the man died, the family contacted the funeral home and the director simply pulled out the file and said, “here is what he wanted …” The instructions indicated –

  • The type of service that was to be conducted;
  • Who was to officiate;
  • What type of music was to be played; and, he specified hymns that had special meaning to both him and his family;
  • Who he wanted to present the eulogy;
  • Where his ashes were to be buried.

In fact, not only had all of the arrangements been made, the expenses had been pre-paid.  Clearly, the loss of a husband and father is devastating for any family.  However, this man relieved his family of an enormous burden and, as he had so many times before and in so many ways, demonstrated his love and concern for their well-being.

Filed Under: Financial Planning, pre-need planning, what my family needs to know Tagged With:
Newer Posts »