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 At
the Kovacs Financial Group, we
feel that strategic Retirement
Planning is ultimately the
foundation to building one’s
overall net worth. When it comes
to investing for retirement, the
old adage holds: It’s not what
you make, but what you keep that
counts. That’s why all
retirement savings vehicles
offer some kind of tax break.
Traditional Retirement
Planning
Setting aside money for your
retirement plans is just the
beginning of saving for a
financially secure future.
Choosing what investment
products to utilize is a much
larger part of the equation. A
traditional IRA (individual
retirement account) is an
account that is used to save
pre-tax dollars for use in
retirement. The primary
benefit of a traditional IRA is
that in most cases, the
contributions are made on a
pre-tax basis. This means that
when you deposit money into the
IRA, you can deduct that amount
from your taxable income. This
results in paying less income
tax for the year. In addition to
receiving the tax deduction up
front, the money in the account
grows tax-deferred. Any interest
or capital gains from the
investments are not taxed when
the gains are realized. Instead,
they are deferred until money is
withdrawn from the IRA, at which
point the money is taxed as
ordinary income. Anyone with
earned income is eligible to
open a traditional IRA, but
there are some restrictions as
to who can deduct the
contributions. There are income
limits that are used to
determine how much of the
contributions are deductible, if
any at all.
These are the most
common types of Traditional
Retirement Plans:
• 401(k) Plans
• Safe Harbor 401(k) Plans
• Profit Sharing Plans
• Money Purchase Plan
• Defined Benefit Plan
• 403(b) Plan
• 457(b) Plan
• Deferred Compensation Plans
• Simple IRA
• SEP IRA
ROTH Retirement Planning
A Roth IRA is a special type of
individual retirement
arrangement that has unique tax
benefits different from those
associated with “Traditional”
IRAs. Traditional IRAs and
401(k)s allow you to defer
paying income tax on the money
you save and the interest it
earns until you withdraw it.
It’s a good deal for both you
and the tax man. The government
never gives you something for
nothing. The reason it gives you
the tax break for 401k(s) is
because they know you’re your
money will grow many times over.
They will just tax you on that
larger amount later. In
contrast, with Roth IRAs and
Roth 401(k)s, you save money on
which you’ve already paid taxes,
but the interest you earn is
forever tax-free. By paying
taxes up front at your current
rate, you protect yourself
against higher tax rates in the
future. Perhaps the most
important difference between
Traditional IRAs and Roth IRAs
is the tax treatment of the
earnings that accrue within each
type of IRA. Earnings that
accrue within a Traditional IRA
are “tax-deferred” meaning they
are not tax until they are
distributed from the Traditional
IRA. On the other hand, earnings
that accrue within a Roth IRA
are typically tax free, meaning
they are not taxed at the time
of accrual or when they are
subsequently distributed from
the Roth IRA. In addition,
Traditional IRA contributions
are often tax deductible while
Roth IRA contributions are
always made with after-tax
dollars.
Unlike with Traditional IRAs,
distributions are not required
from Roth IRAs when you reach
age 70½. In fact, you may even
continue funding a Roth IRA
beyond age 70½ provided you (or
your spouse) have earned income
from working and meet certain
other basic eligibility
criteria.
It is our opinion that TAX FREE
is the best way to go when given
the choice. Unfortunately for
some, the Roth Retirement
Planning options are not
available because they may be
over the income limitations.
Individuals whom are unable to
invest their retirement assets
in a Roth Retirement Plan must
invest them in a Traditional
Retirement Plan.
Spotlight on 2010
For the year 2010, anyone,
regardless of income, can
convert a traditional IRA into a
Roth IRA. You will have to pay
taxes on the money you convert,
but you’ll be able to pay your
tax bill over a two-year period,
in 2011 and 2012. So to get into
a Roth, regardless of income,
you need only to open a regular
IRA and convert it after 2010.
The 401(k) is more welcoming:
There are no income limits to
participating in a Roth 401(k).
You just need to work for a
company that offers one. If your
company does, your after-tax
contributions go into the Roth
401(k) account and your
company’s pretax contributions
go into a separate traditional
401(k) account.
Give us a call today at
732.349.5353
or review your own Retirement
Plan today! |
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