Word Chapter 4 Grader Project [Homework 1] (Chapter Capstone Exercise)

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Abstract

This paper describes the various types of retirement plans available to American citizens.

TYPES OF RETIREMENT PLANS

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It is never too early to save for your retirement. For a start, you can estimate the amount that you need to have before you can retire comfortably using financial calculators found on sites such as CNN Money, Kiplinger, Motley Fool, and TIAA-CREF financial services. The good part is, there are many different types of retirement plans that you can participate, individually or with your employers. To help you save for retirement, there are many government-regulated and government-approved retirement accounts that you can contribute a certain amount to annually. Why should you enroll in a retirement plan now? Did you know that your retirement can last for 30 years or more? A common rule to follow is that a retiree will need up to 80% of his/her annual income today to retire comfortably. Unfortunately, the average benefit amount paid monthly by the Social Security Administration is only $1,177.

Below are many advantages why you should start saving now:

• Tax on employee and employer contributions is deferred until distributed.

• Investment gains in the plan are not taxed until distributed.

• Retirement assets can be carried from one employer to another.

• Contributions can be made easily through payroll deductions.

• Saver’s Credit is available.

• Flexible plan options are available.

• Better financial security at retirement.

Source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Benefits-of-Saving-Now

A contribution is defined as the amount that an employee and an employer can put into a retirement plan. There are, however, varying limits on how much we (including both employers and employees) can contribute to any of the retirement plan. Each plan has its own rules and criteria, and must specifically state that contributions or benefits cannot exceed certain limits. Employees can participate in contributions via salary reduction. Employers can match employees’ contributions or contribute outright a certain amount into the employees’ retirement account.

There are two major kinds of IRAs – traditional and Roth. A traditional IRA is a way to save for retirement that gives you tax advantages. It allows you to make tax-deferred investments to provide financial security when you retire. Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. You can contribute to a maximum of $5,500 ($6,500 if you are age 50 or older) every year to a IRA.

A Roth IRA is similar to a Traditional IRA in many ways, and is also subjected to the same rules that apply to a traditional IRA. But the major disadvantage of a Roth IRA is that you cannot deduct your contributions to a Roth IRA on your tax return. On the other hand, your distribution, which includes both your contribution and earnings, are not subject to taxes when you withdraw your investments later.

Some of the rules and regulations governing a Roth IRA include the following:

• If you satisfy the requirements, qualified distributions are tax-free.

• You can make contributions to your Roth IRA after you reach age 70 ½.

• You can leave amounts in your Roth IRA as long as you live.

• The account or annuity must be designated as a Roth IRA when it is set up.

• The same combined contribution limit applies to all of your Roth and traditional IRAs.

• Limits on Roth IRA contributions is based on modified AGI.

• Your Roth IRA contribution might be limited based on your filing status and income.

You can save your money for retirement in a traditional IRA and/or a Roth IRA. Which method is a better form of investment depends on various criteria. The table below highlights some of the similarities and differences between these two options.

Source: (Traditional and Roth IRAs, 2015)

A 401(k) is a qualified profit-sharing plan that allows employees to contribute a portion of their wages to their individual retirement accounts at their workplace. This qualified plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. With a 401(k) plan, employees can choose to defer some of their salary to a retirement account. In other words, instead of receiving that amount in their paycheck, the employee chooses to defer, or delay, getting that money by putting their deferred money into a 401(k) plan sponsored by their employer. The deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee’s individual income tax return. However, this deferred money and its earnings will be taxed when it is distributed later on.

You can make a 401(k) plan as simple or as complex as you want to. A 401(k) plan that is pre-approved by the IRS might be just the thing to cut down on administrative headaches and expenses.

Advantages and disadvantages of a 401(k) plan:

• Greater flexibility in contributions.

• Employees may contribute more to this plan than under IRA plans.

• Good plan if cash flow is an issue.

• Optional participant loans and hardship withdrawals add flexibility for employees.

• Administrative costs may be higher than under more basic arrangements.

• Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.

• Additional withdrawal and loan flexibility adds administrative burden for the employer.

A 403(b) is a tax-sheltered annuity (TSA) plan. It is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. This plan is quite similar to a 401(k) plan which is maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan allows employees to defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it is distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed. Employees save for retirement by contributing to individual accounts, and employers can also contribute to the employees' accounts.

Advantages of a 403(b) plan include the following:

• Flexibility in contributions.

• Investment options are limited to those chosen by the employer.

• may have high administrative costs.

• optional loans and hardship distributions add flexibility for employees.

The following employees are eligible to participate in a 403(b) plan:

• Employees of tax-exempt organizations established under §501(c)(3) of the Code.

• Employees of public school systems who are involved in the day-to-day operations of a school.

• Employees of cooperative hospital service organizations.

• Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).

• Employees of public school systems organized by Indian tribal governments.

• Certain ministers if they are:

• • Ministers employed by §501(c)(3) organizations.

  • Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.

  • Ministers (chaplains) who meet both of the following requirements.

• • • They are employed by organizations that are not §501(c)(3) organizations.

    • They function as ministers in their day-to-day professional responsibilities with their employers.

This paper summarizes the various types of retirement plans that employees can participate to save for their own retirement. There are many pros and cons for each of the plans, and you need to find the one plan that works best for you.