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Educational Articles

Educational Articles

  • First Things First: Choosing the Right Retirement Plan

    Key Points

    • DB Defined
    • DC Defined
    • Cash Balance Plans
    • Points to Remember


    For employers, the decision to offer workers a retirement plan addresses critical business needs. However, it also raises the question: What type of plan -- defined benefit (DB) or defined contribution (DC) or a combination of both -- best addresses the goals of participants as well as those of the company?

    The following overview provides the fundamental information on the different types of plans and will help you narrow down your search for the best possible retirement plan.

    DB Defined

    What exactly is a DB plan? Essentially, DB plans are the old-fashioned "pension plans" that are funded and managed by employers who bear the responsibility of providing a predetermined retirement benefit for retired employees. The actual dollar amount of benefits to be paid to each retiree by a DB plan is based on a formula (identified in the official plan documentation) and is typically determined by each individual's age, length of service, and level of compensation.

    Because DB plans assume the responsibility for paying a predetermined (i.e., "defined") benefit to retirees, many argue that they represent the best way for employers to help provide true retirement security. DB plans are often perceived as representing better "public policy" because they also tend to be more valued by -- and more generous to -- longer-tenured employees who prefer stability and predictability in their financial lives. However, participants do face the risk of "unfulfilled expectations" that may arise in the event of a job loss, plan termination, or plan underfunding. (The federal Pension Benefit Guaranty Corporation (PBGC) insures DB plans in the event that an employer fails to provide full funding. If a plan terminates without full funding, PBGC will pay the benefits promised by the plan up to certain limits.)

    In general, DB plans are more costly for employers to sponsor than DC plans. They are also more complex to administer. For example, DB plans require employers to pay insurance premiums and hire actuaries. In addition, expenses related to funding DB plans appear on corporate financial statements. And employers must adhere to special regulations if they decide to terminate a DB plan early. By contrast, a DC plan can be terminated much more easily.

    DC Defined

    DC plans can be viewed as the mirror image of DB plans. Instead of being funded, invested, managed, and paid out by employers, DC plans place the responsibility for those decisions and strategies on the shoulders of each individual participant. The employer has no responsibility to provide a predetermined retirement benefit.

    The three most common types of DC plans are 401(k) plans, 403(b) plans, and 457 plans, which are sponsored by companies, nonprofits, and government agencies, respectively.

    In general, DC participants decide how much money to contribute to their individual (and uninsured) accounts and how to manage their investments up to and throughout retirement. In other words, participants bear most of the risks normally associated with investing in securities markets. Consequently, the goal of achieving retirement security with a DC plan can be threatened by bad investment decisions or market volatility.

    DC plans are usually less expensive to administer than DB plans, and future expenses can be easier to predict. Yet it's important to remember that DC plans have the potential to be more expensive for the workers themselves, since participants are often required to pay at least a portion of any administrative, actuarial, and investment fees incurred by the plan.

    Still, research indicates that DC plans are most appreciated by younger workers who place a high priority on being able to control their money and understanding how their retirement plan operates. Part of their appeal is the fact that DC assets are highly portable, meaning that workers can easily transfer balances to other qualified retirement accounts when changing jobs. They can also opt to cash out by taking a lump-sum distribution after separating from service. However, they'll have to pay taxes on their distributions and early withdrawal penalties may apply.

    Some types of DC plans also give employers the option of making tax-deductible matching contributions to participants' accounts, subject to certain limits. While an employer match obviously increases employer costs, it can be a valuable tool for attracting and retaining employees. An employer match may also inspire better financial behavior by participants. For example, one study revealed that 69% of plan participants cited the employer match as the reason they enrolled in their 401(k) plan.1

    DB and DC -- Compare and Contrast

    DB DC
    • completely funded by employer
    • employer is responsible for making up shortfalls
    • insured by the federal Pension Benefit Guaranty Corporation
    • plan costs are shouldered by employer
    • most attractive to older, long-standing employees
    • funded by participant contributions (employer may make matching contributions)
    • employer has no responsibility to provide a predetermined retirement benefit
    • individual participants assume all investment risks
    • uninsured
    • participants often pay a portion of plan administrative costs most attractive to younger, more mobile workers

    Cash Balance Plans

    An increasingly popular type of retirement plan is the cash balance plan, which combines aspects of both DB and DC plans. As in a DC plan, cash balance plan participants have their own accounts and can transfer assets when switching jobs. If the new employer doesn't have a cash balance plan, cash balance plan assets may be rolled into an IRA. Like a DB plan, however, the employer is responsible for all funding of accounts and bears all investment risk. The employer must make sure that participants' accounts have enough money to pay out total contributions plus specified interest, regardless of the performance of plan investments.

    Keep in mind that regardless of the type of retirement plan a company decides to offer, the federal Employee Retirement Income Security Act (ERISA) stipulates that it must be established and managed in the best interests of its participants. So while it certainly makes sense to determine which option best addresses your company's needs, the final decision must ultimately take into account the long-term needs of your workforce.

    Points to Remember

    1. DB plans are funded, invested, and managed by plan sponsors (i.e., employers), whereas DC plans require individual participants to determine the amount of their contribution as well as their investment and distribution strategies.
    2. DB plans are typically more popular with older, long-standing workers, while DC plans are generally favored by younger, more mobile workers who value the ability to control their own accounts.
    3. Cash balance retirement plans have characteristics of both DB and DC plans. As with DB plans, employers are responsible for guaranteeing benefit payments. But as with DC plans, participants have their own accounts and may transfer assets when changing jobs.
    4. Regardless of your business needs, keep in mind that ERISA mandates that each retirement plan must be established and managed in the best interests of its participants.

    1PLANSPONSOR magazine, November 16, 2010.



    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

  • Make the Most of Your 401(k)

    Key Points

    • What Is a 401(k)?
    • Tax Treatment of 401(k) Plans
    • Matching Contributions
    • Consider the Advantage of Tax Deferral
    • 401(k) Advantages
    • Choosing Investments
    • When You Change Jobs
    • Borrowing From Your Retirement Plan
    • Work With Your Financial Advisor
    • Points to Remember


    As more Americans shoulder the responsibility of funding their own retirement, many rely increasingly on their 401(k) retirement plans to provide the means to meet their investment goals. That's because 401(k) plans offer a variety of attractive features that make investing for the future easy and potentially profitable. Be sure to talk to your employer or plan administrator about the specific features and rules of your plan.

    What Is a 401(k)?

    A 401(k) plan is an employee-funded savings plan for retirement. It takes its name from the section of the Internal Revenue Code that created these plans. 401(k) plans are also known as "qualified defined contribution" retirement plans: qualified because they meet the tax law requirements for favorable tax treatment (described below); and defined contribution because contributions are defined under the terms of the plan, while benefits will vary depending on plan balances and investment returns.

    Tax Treatment of 401(k) Plans

    The 401(k) plan allows you to contribute up to $17,500 of your salary in 2013 to a special account set up by your company. Future contribution limits will be adjusted for inflation. Keep in mind that individual plans may have lower limits on the amount you can contribute. In addition, individuals aged 50 and older who participate in a 401(k) plan can take advantage of so-called "catch up" contributions of an additional $5,500 in 2013.

    401(k) plans now come in two varieties: traditional and Roth-style plans. A traditional 401(k) plan allows you to defer taxes on the portion of your salary contributed to the plan until the funds are withdrawn in retirement, at which point contributions and earnings are taxed as ordinary income. In addition, because the amount of your pre-tax contribution is deducted directly from your paycheck, your taxable income is reduced, which in turn lowers your tax burden.

    The tax treatment of a Roth 401(k) plan is different. Under a Roth plan, contributions are made in after-tax dollars, so there is no immediate tax benefit. However, plan balances grow tax free; you pay no taxes on qualified distributions.

    Both traditional and Roth plans require that distributions be qualified. In general, this means they must be taken after 59½ (or age 55 if you are separating from service from the employer whose plan the distributions are withdrawn), although there are certain exceptions for hardship withdrawals, as defined by the IRS. If a distribution is not qualified, a 10% IRS penalty will apply in addition to ordinary income taxes on all pre-tax contributions and earnings.

    If your plan permits, you can make contributions in excess of the 2013 limit of $17,500 ($23,000 if over age 50), as long as your total contribution is not more than 100% of your pre-tax salary, or $51,000 in 2013, whichever is less. That means if your salary is $100,000, you may be able to contribute up to $51,000 total to your 401(k) plan during 2013. In the case of a traditional 401(k), however, only the first $17,500 ($23,000 if over 50) of your contributions can be made pretax in 2013; contributions over and above that amount must be made after tax and do not reduce your salary for tax purposes.

    Matching Contributions

    Besides its favorable tax treatment, one of the biggest advantages of a 401(k) plan is that employers may match part or all of the contributions you make to your plan. Typically, an employer will match a portion of your contributions, for example, 50% of your first 6%. Under a Roth plan, matching contributions are maintained in a separate tax-deferred account, which, like a traditional 401(k) plan, is taxable when withdrawn.

    Employer contributions may require a "vesting" period before you have full claim to the money and their investment earnings. But keep in mind that if your company matches your contributions, it's like getting extra money on top of your salary.

    401(k) Advantages

    • Tax-deferred contributions and earnings on traditional plans.
    • Tax-free withdrawals for qualified distributions from Roth-style plans.
    • Choice among different asset classes and investment vehicles.
    • Potential for employer-matching contributions.
    • Ability to borrow from your plan under certain circumstances.

    Tax-Deferred Compounding

    The benefit of compounding reveals itself in a tax-advantaged account such as a 401(k) plan. If your $100 monthly contribution accumulates tax-deferred over 30 years, you could grow your retirement nest egg to $150,030. That's a difference of almost $50,000 just because you didn't have to pay taxes up front.1 Of course, you'll have to pay taxes on earnings and deductible contributions to a traditional 401(k) when you withdraw the money. But that will likely be when you are retired and may be in a lower tax bracket.

    Choosing Investments

    Generally, 401(k) plans provide you with several options in which to invest your contributions. Such options may include stocks for growth, bonds for income, or money market investments for protection of principal. 2 This flexibility allows you to spread out your contributions, or diversify, among different types of investments, which can help keep your retirement portfolio from being overly susceptible to different events that could affect the markets.3

    When You Change Jobs

    When you change jobs or retire, you generally have four different options for what to do with your plan balance. You can keep the plan in your former employer's plan, if permitted; you can transfer balances to your new employer's plan; you can roll over the balance into an IRA; or you can take a cash distribution. The first three options generally entail no immediate tax consequences; however, taking a cash distribution will usually trigger 20% withholding, a 10% IRS penalty tax if taken before age 59½, and ordinary income tax on pre-tax contributions and earnings.

    When deciding on which of the first three options to choose, you should consider available investment options and ease of access. Often, rolling over to an IRA provides the greatest flexibility and control, while affording a wide choice of investment alternatives.

    Borrowing From Your Retirement Plan

    One potential advantage of many 401(k) plans is that you can borrow as much as 50% of your vested account balance, up to $50,000. In most cases, if you systematically pay back the loan with interest within five years, there are no penalties assessed to you.

    If you leave the company, however, you may have to pay back the loan in full immediately, depending on your plan's rules. In addition, loans not repaid to the plan within the stated time period are considered withdrawals and will be taxed and penalized accordingly.

    Work With Your Financial Advisor

    A 401(k) plan can become the cornerstone of your personal retirement savings program, providing the foundation for your future financial security. Consult with your plan administrator or financial advisor to help you determine how your employer's 401(k) plan could help make your financial future more secure.

    Points to Remember

    1. A traditional 401(k) plan allows you to defer taxes on part of your salary. A Roth 401(k) accepts after-tax contributions, but allows for tax-free withdrawals in retirement.
    2. Contribution limits are $17,500 in 2013 ($23,000 if age 50 or older). Future contribution limits will be indexed for inflation.
    3. One of the biggest advantages of 401(k)s versus other retirement plans is that employers may match part or all of the contributions you make to your plan.
    4. 401(k) plans provide you with several options in which to invest your contributions.
    5. If you leave your company and take a cash distribution, taxes and penalties will likely apply.
    6. Some 401(k)s allow you to borrow as much as 50% of your vested account balance, up to $50,000.

    1This example is hypothetical in nature and is not indicative of future performance in your retirement plan. Withdrawals prior to age 59½ are subject to a 10% IRS penalty tax.

    2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

    3Diversification and asset allocation do not ensure a profit or protect against a loss in a declining market.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

  • Make the Most of Your Traditional IRA

    Key Points

    • What Is a Traditional IRA?
    • Rules on Contribution Limits
    • Tax Treatment of IRAs
    • The Magic of Tax-Deferred Compounding
    • Change Jobs, But Keep Your Retirement Money
    • Withdrawing From Your IRA
    • Consult Your Financial Advisor
    • Points to Remember


    Investors have two options for their individual retirement accounts (IRAs). The first option is a traditional IRA, and the second option is a Roth IRA (named for the account's congressional sponsor), which features -- among other benefits -- the ability to receive tax-free earnings under certain circumstances. In this report, we'll discuss the features of the traditional IRA. You may want to review material outlining the Roth IRA -- or talk to your financial planner -- before you make a decision as to which IRA is right for you.

    What Is a Traditional IRA?

    An individual retirement account allows your investment earnings to grow tax-deferred until withdrawn, typically at retirement. Generally, if you have earned income or receive alimony, you can establish as many IRA accounts as you want prior to the tax year in which you reach age 70½. You may also have an IRA even if you participate in a qualified pension, profit-sharing, or other retirement plan. Your entire contribution may not be deductible on your income tax return, depending on your income and your eligibility for an employer-sponsored retirement plan.

    IRAs offer two distinct advantages in terms of taxes: potential deductibility of contributions and tax deferral on investment earnings.

    Rules on Contribution Limits

    In 2013, the maximum annual contribution is $5,500 (in general, married couples filing jointly can contribute a total of $11,000, even if only one spouse has income). Thereafter, the contribution limit will be adjusted for inflation. Individuals aged 50 and older are now able to take advantage of "catch up" contributions to IRAs. The allowable catch-up contribution is $1,000 per year. Maximum contributions may not exceed earned income.

    In addition, you can open an IRA or make contributions to an existing IRA as late as the deadline for filing a tax return for that year. That means you would have until April 2014 to make your 2013 IRA contribution.

    Tax Treatment of IRAs

    Contributions to a traditional IRA may or may not be deductible from your earned income in a given tax year depending on your situation. Income limits apply if either you or your spouse participates in an employer-sponsored retirement savings plan. Deductibility is phased out over certain ranges of income as follows:

    Traditional IRA Deductibility Phaseout Ranges for 2013*

    $ in Thousands
    Single Filers Joint Filers
    Those covered by an employer-sponsored retirement plan $59-$69 $95-$115
    Those not covered by an employer-sponsored retirement plan, but filing a joint return
    with a spouse who is covered
    N/A $178-$188
    *Based on modified adjusted gross income (MAGI).

    The Magic of Tax-Deferred Compounding

    The ability to make tax-deductible contributions to a traditional IRA can help your current tax situation. But you may want to invest in an IRA whether or not your contributions are deductible. Why? The real advantage of investing in an IRA is tax-deferred compounding of your investment earnings over the long term.

    For example, if you had contributed $100 every month for 30 years to a tax-deferred IRA, then paid 25% tax on your withdrawals at retirement, you could have netted $112,522, assuming an 8% average annual rate of return. However, in an account that's taxed annually at a hypothetical rate of 25%, your total would have been only $100,954 -- almost $12,000 less just because you had to pay taxes up front!1

    Consider the Advantage of Tax Deferral

    As you evaluate the potential benefits of an IRA, consider the advantage of tax deferral. This chart shows the result when a hypothetical $100 monthly investment is made for 30 years in a tax-deferred plan versus the same investment taxed annually at a hypothetical rate of 25%, assuming an 8% average rate of return compounded monthly. If the final tax-deferred amount is withdrawn at retirement and taxed at a hypothetical rate of 25%, it exceeds the taxable final amount by nearly $12,000.

    Change Jobs, But Keep Your Retirement Money

    IRAs can also come in handy when you're about to leave jobs and need to move your 401(k) money. If your former employer requires that you withdraw your retirement money, you can move your distribution safely from your former employer's qualified retirement plan into a rollover IRA and avoid owing current income tax on the distribution.

    If you choose to physically receive part or all of your money and do not replace the entire amount within 60 days, you will be subject to penalty fees and taxes on the amount kept.

    Withdrawing From Your IRA

    Generally, any distribution you receive from an IRA before the day you reach age 59½ is subject to a 10% additional tax imposed by the IRS, in addition to federal and state income tax. Beginning at age 59½, you can withdraw money (of which any deductible contributions and investment earnings are taxable at your then-current income tax rate) from your IRA as desired without additional tax, whether or not you are still employed.

    But, as with any rule, there are exceptions. Distributions before age 59½ are not subject to the additional tax under certain circumstances, including when:

    • You become permanently disabled.
    • You die before age 59½ and distributions are made to your beneficiary or estate after your death.
    • You make withdrawals to pay deductible medical expenses that exceed 7.5% of your adjusted gross income.
    • You make withdrawals for a qualified first-time home purchase (lifetime limit of $10,000).
    • You make withdrawals to pay qualified higher education expenses for yourself, a spouse, children, or grandchildren.

    By April 1 following the year in which you reach age 70½, you must begin withdrawals from your IRA. A great advantage of taking only the required minimum distribution amount is that the balance continues to compound tax-deferred. However, if your distributions in any year after you reach age 70½ are less than the required minimum, you will be subject to an additional tax equal to 50% of the difference.

    Consult Your Financial Advisor

    An IRA can become the cornerstone of your personal retirement savings program, providing the foundation for your financial security. That's why it is so important to start planning today. Consult with your financial advisor to help you determine how an IRA could help make your financial future more secure.

    Points to Remember

    1. If you have earned income or alimony, you can establish as many IRA accounts as you want prior to the tax year in which you reach age 70½. Keep in mind, however, that you may be incurring annual account fees for each account, so maintaining multiple accounts may not be a prudent decision.
    2. Contribution limits are $5,500 or 100% of your earned income, whichever is less. Special "catch up" contributions of $1,000 are also available to individuals who are at least 50 years old.
    3. You can open an IRA or make contributions to an IRA as late as the tax-filing deadline for that year.
    4. Income limits restricting the deductibility of contributions apply if either you or your spouse participate in an employer-sponsored retirement savings plan.
    5. A major advantage of investing in an IRA is tax-deferred compounding of earnings.
    6. By April 1 following the year in which you reach age 70½, you must begin withdrawals from your IRA.
    7. Individuals under the age of 59½ can make penalty-free withdrawals to pay college expenses for themselves, a spouse, children, or grandchildren.

    1This example is hypothetical in nature and is not indicative of future performance in your retirement plans.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

  • The Roth Individual Retirement Account

    Key Points

    • Rules of the Roth IRA
    • The Traditional IRA vs. the Roth IRA
    • The Traditional IRA
    • Conversion of a Traditional IRA to a Roth IRA
    • Which Is Right for You?
    • Points to Remember


    The Roth IRA presents a potentially attractive alternative to the traditional IRA long favored by many Americans as a cornerstone in their retirement planning efforts. That's because a Roth IRA may allow you to avoid future taxation of your retirement funds by making nondeductible contributions now.

    Rules of the Roth IRA

    Following is a summary of the rules for Roth IRAs:

    Unlike the traditional IRA, contributions to a Roth IRA are nondeductible regardless of your income level or participation in a company-sponsored retirement plan.

    Your total annual contributions to all IRAs are limited to $5,500 in 2013. Individuals who are at least 50 years old by the end of the year are also able to make so-called catch-up contributions to a Roth IRA. The allowable catch-up contribution is $1,000 per year but is not adjusted for inflation. The contribution limit begins to decline or "phase out" for single taxpayers with adjusted gross incomes (AGIs) of more than $112,000 and for married couples filing jointly with AGIs of more than $178,000. Individuals with AGIs in excess of $127,000 ($188,000 for married couples filing jointly) are not eligible for a Roth IRA. Married taxpayers filing separately are not allowed to contribute to a Roth IRA.

    Contribution limits may increase in the years ahead. In the future, the annual contribution limit may be adjusted for inflation.

    Your contributions to a Roth IRA may continue beyond age 70½. You are not required to start taking distributions from a Roth IRA at age 70½, as you are with a traditional IRA, and you can continue to contribute as long as you have earned income. When a Roth IRA owner dies, however, his or her heirs must adhere to the same minimum distribution rules that apply to traditional IRAs.

    Qualified distributions from a Roth IRA are tax free. While your contributions to a Roth IRA are never tax deductible, your distributions may be tax free if you have owned the Roth IRA for at least five years and:

    • You are at least 59½ years old or you qualify for one of several exceptions; or
    • Your withdrawal of up to $10,000 (lifetime limit) is applied to a first-time home purchase; or
    • You die or become permanently disabled.

    You may qualify for the "first-time home purchase" if you have not owned a home for at least two years before the date on the purchase contract or the date when construction started. You, your spouse, or a descendant or ancestor of either may qualify as the buyer.

    The taxable portion of a nonqualified distribution is subject to a 10% tax penalty. If you make withdrawals that do not meet the rules for a qualified distribution, you'll owe taxes on all or a portion of the withdrawal. You must also pay a 10% penalty tax on the taxable portion of the withdrawal.

    Penalty-free withdrawals are permitted for qualified education expenses. If you are under age 59½ but have held the Roth IRA for five years, you may withdraw funds penalty free to pay for qualified education expenses for yourself or family members. You will have to pay income tax on the taxable portion of the distribution, however.

    Retirement plan "rollovers" are permitted. If you are changing jobs or retiring, you can roll over funds from an employer retirement plan, such as a 401(k) account, directly to a Roth IRA. In the past, you could do this only if your workplace retirement account was a Roth-style plan. But since 2008, direct rollovers from a non-Roth plan have been allowed. The rollover is treated as a conversion, with income taxes due on all proceeds.

    The Traditional IRA vs. the Roth IRA

    When deciding whether a traditional IRA or a Roth IRA is best for you, you'll want to compare the after-tax dollars that would be available to you under each option. This will depend on many factors, including your tax bracket, how many years you have until retirement, and when you wish to begin making withdrawals. For many people, a Roth IRA will result in more after-tax income during retirement because qualified withdrawals from a Roth IRA are tax free, while withdrawals from a traditional IRA will be taxed.

    For those whose contributions to a traditional IRA are tax deductible and who are in a higher tax bracket today than they will be in during retirement, a traditional IRA may be the smart choice.

    If you are not eligible to participate in a company-sponsored retirement plan, you can make deductible contributions to a traditional IRA regardless of your income level, up to $5,500 in 2013 (or $6,500 if you are at least 50 years old). Deductible contributions may be reduced or eliminated for individuals who participate in a company-sponsored retirement plan, based on their incomes.

    The Traditional IRA

    The traditional IRA may still provide an advantage over the Roth IRA to those who maximize its benefit. Here's how: You invest the tax savings from your IRA deduction in a traditional account each year and let that account grow along with your IRA. Assuming your tax rate drops in retirement, this could yield more of a tax-adjusted benefit than a Roth IRA.

    Conversion of a Traditional IRA to a Roth IRA

    There are no income limits associated with the conversion of a traditional IRA to a Roth IRA -- anyone can convert, provided they pay the tax bill. Since the investment earnings and capital gains in your regular IRA have not been taxed yet, the government will take its share at the time of the conversion. If you have a nondeductible, traditional IRA, its earnings will be taxed but the amount of your contributions will not. The withdrawal from your traditional IRA will count as income but will not trigger the 10% penalty usually imposed on early withdrawals.

    Which Is Right for You?

    If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:

    • A Roth IRA may be more attractive the further you are from retirement. Why? Because the longer your earnings can grow, the more income you may have that is never taxed. On the other hand, if you convert to a Roth IRA close to retirement, your investments may not have much time to compensate for the associated tax bill.
    • If your traditional IRA contributions are nondeductible, you may be better off with a Roth IRA.That's because the distributions of earnings from your traditional, nondeductible IRA will eventually be taxed. The qualified distributions from a Roth IRA will not.
    • Your current and future tax brackets will affect which IRA is best for you. For example, if you are currently in a high tax bracket and expect to be in a much lower tax bracket during retirement, a traditional IRA could be the best option. Why? Because you may be able to claim a deduction on your contributions now and then pay taxes on future distributions at the lower rate later. Keep in mind that some experts say you could still come out ahead with a Roth IRA if you can fund it for at least 12 or 15 years before retirement.

    As you can see, there is no easy answer to the question, "Which IRA is best for me?" As with any major financial decision, careful consultation with a professional is a good idea before you make your choice. In addition to helping you with calculations and projections, a professional is also likely to know what, if any, changes or clarifications have been made to the complex new tax laws. Remember, your retirement could last 20 years or more. How you live tomorrow could depend on the choices you make today.

    The information contained herein is general in nature and is not meant as tax advice. Consult a tax professional as to how this information applies to your situation.

    Points to Remember

    1. Roth IRA contributions are nondeductible, but qualified withdrawals are tax free.
    2. Individual contributions to all IRAs are limited to $5,500 in 2013 ($6,500 for investors who are at least 50 years old). Note that this amount may increase in the years ahead.
    3. You may continue contributions to a Roth IRA after age 70½, and there are no mandatory withdrawals.
    4. You can make penalty-free withdrawals from a Roth IRA before age 59½ for a first-time home purchase or if you die or become permanently disabled.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

  • Redefining Retirement in the 21st Century

    Key Points

    • Creating a New Life Cycle
    • Plan for the New Retirement
    • Prepare Today for the Retirement of Tomorrow
    • Points to Remember


    When a man retires and time is no longer a matter of urgent importance, his colleagues generally present him with a clock.
    - R.C. Sheriff


    The days may be over when a gold watch is a somewhat ironic and less-than-useful gift for a retiree. If the experts are on target, retirement in the next century will scarcely resemble the conventional image of lazy days spent on cruise ships and golf courses. You might plan to open a business of your own. Or perhaps you'll return to school for that graduate degree you never had the chance to complete. Of course, you'll probably still find time to sit back and put your feet up.

    Creating a New Life Cycle

    At the turn of the 20th century, the average life expectancy was 47 years. Today, the average American newborn can look forward to about 78 years of life. What's more, the average life expectancy for today's 65-year-old has increased to 84, according to the National Center for Health Statistics.

    Creating a New Life Cycle

    What's behind this trend? Some causes are obvious, such as improved health care, both early on in the form of preventative medicine and during the later years of life. Medical advances, including hypertension drugs and hip replacements, allow older Americans to remain active. Healthier lifestyles are also a contributing factor.

    "People are treating their bodies with greater respect," said Dr. Sanford Finkel of the Buehler Center on Aging at Northwestern University. "They're giving up smoking, learning to eat right, and exercising regularly. Inevitably, these trends lead to healthier, longer, more productive lives."

    The result is a new way of thinking about age. In her best-selling book, New Passages, Gail Sheehy argues that the "mid-life passage" generally thought to take place at age 40 now occurs a decade later. The period between ages 45 and 65 is no longer middle and old age, according to Sheehy, but a "second adulthood." Psychologist Ken Dychtwald, chief executive officer of Age Wave Inc., a California-based consulting firm, also sees new lines being drawn. Using his model, ages 25 to 40 represent young adulthood, while ages 40 to 60 comprise a new stage known as "middlescence." Next comes late adulthood (60 to 80), followed by old age (80 to 100), and very old age (100+).

    But perhaps more important than the categories is the effect that longer, healthier lives may have on the traditional life cycle of education, work, and retirement. It will be replaced by a less linear cycle, according to Dychtwald, who predicts short-term retirements, followed by any combination of career shifts, part- or flex-time work, entrepreneurial endeavors, and continuing education peppered with occasional "mini-retirements."

    Today's older American doesn't hesitate to change jobs -- or careers -- in the pursuit of keeping life interesting. This trend should accelerate. According to the most recent available study by the Bureau of Labor Statistics, the percentage of Americans aged 65 years or older who participate in the labor force is expected to increase from about 17% in 2008 to more than 22% by 2018.1

    Plan for the New Retirement

    So what does this redefined retirement mean to you? There is no one answer. In the coming decades, "retirement" will mean something different to each of us. Regardless of your decision, you'll need to design a financial plan suited to your specific vision of the future.

    Retirement Income -- A good starting point might be to examine your sources of retirement income. If you pay attention to the financial press, you've probably come across at least a few commentators who speak in gloom-and-doom terms about the future for American retirees, decrying a lack of savings and warning of the imminent growth of the elderly population.

    True, there is widespread concern about at least one traditional source of income for retirees -- Social Security. Under current conditions, Social Security funds could fall short of needs by 2033, according to the Social Security Administration. But the reality is that Social Security was intended only to supplement other sources of retirement income. In fact, Social Security benefits account for only 37% of the aggregate income of today's retirees, according to the Social Security Administration.

    Even pension plans, once considered a staple of retirement income, only account for 18% of the retirement-income pie. In recent years, employers have been moving from traditional defined benefit plans based on salary and years of service to defined contribution plans, such as 401(k) plans, funded primarily by the employees.

    This shift makes it even more important for individuals to understand their goals and have a well-thought-out financial plan that focuses on the key source of retirement income: personal savings and investments. Given the potential duration and changing nature of retirement, you may want to seek the assistance of a professional financial planner who can help you assess your needs and develop appropriate investment strategies.

    As you move through the various stages of the new retirement, perhaps working at times and resting at others, your plan may require adjustments along the way. A professional advisor can help you monitor your plan and make changes when necessary. Among the factors you'll need to consider:

    Time -- You can project periods of retirement, reeducation, and full employment. Then concentrate on a plan to fund each of the separate periods. The number of years until you retire will influence the types of investments you include in your portfolio. If retirement is a short-term goal, investments that provide liquidity and help preserve your principal may be most suitable. On the other hand, if retirement is many years away, you may be able to include more aggressive investments in your portfolio. You will also need to keep in mind the number of years you may spend in retirement. Thirty years of retirement could soon be commonplace, requiring a larger nest egg than in the past.

    Inflation -- Consider this: An automobile with a price tag of $20,000 today will cost $29,600 in just 10 years, given an inflation rate of just 4%. While lower-risk fixed-income and money market investments2 may play an important role in your investment portfolio, if used alone they may leave you susceptible to the erosive effects of inflation. To help your portfolio keep pace with inflation, you may need to maintain some growth-oriented investments. Over the long-term, stocks have provided returns superior to other asset classes.3 But also keep in mind that stocks generally involve greater short-term volatility.

    Taxes -- Even after you retire, taxes will remain an important factor in your overall financial plan. If you return to work or open a business, for example, your tax bracket could change. In addition, should you move from one state to another, state or local taxes could affect your bottom line. Tax-advantaged investments, such as annuities and tax-free mutual funds, may be effective tools for meeting your retirement goals. Tax deferral offered by 401(k) plans and IRAs may also help your retirement savings grow.

    Prepare Today for the Retirement of Tomorrow

    To ensure that retirement lives up to your expectations, begin establishing your plan as early as possible and consider consulting a professional. With proper planning, you can make retirement whatever you want it to be.

    Points to Remember

    1. As people live longer and healthier lives, retirement begins to take on a whole new look.
    2. You'll need to develop a financial plan suited to your specific vision of the future.
    3. Under current conditions, Social Security funds could fall short of needs by 2033.
    4. You will need to rely on your own personal savings and investments for the majority of your income in retirement.
    5. Keys to determining your financial plan are time, inflation, and taxes.

    1Source: Bureau of Labor Statistics, November 2009. (Most recent available data.)
    2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
    3Past performance is no guarantee of future results.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.


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