PLANNING FOR YOUR RETIREMENT
PLANNING FOR YOUR RETIREMENT
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1- RETIREMENT PLANNING
Social Security payments:
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a- Your Social Security payments will be based on the age that you
retire at and the total dollar amount that has been credited to
your account by the administration.
You should be checking your records about every two years to be
sure that the right amounts have been credited to you. The reason
is because the SSA won't make any corrections if the errors are
older than a period of three years, three months and 15 days.
Since it takes about a year for the SSA to update their records, a
two year check period will give them enough time to make any
corrections in time.
b- Now, you probably want to know how to do this. It's really not
to difficult.
To get a statement: call your local Social Security Administration
office and request a "statement of savings" (postcard Form 7OO4).
You will receive a statement of your account in about two months
after you fill out and mail the form back to the SSA.
This service is free to you. Anyone offering to do this for you
for a fee, is only taking you for a ride.
IRAs:
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There are four types of IRAs available:
Regular IRA:
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a- This type of IRA is the most common type that people have.
If you have income and won't be of age 7O 1/2 on or before
December 31, then you qualify for a Regular IRA.
b- You can be covered under another retirement program and still
open up a Regular IRA.
c- With both spouses employed, each of you can establish your own
seperate Regular IRA and invest in it based on your own seperate
incomes. You simply fill out your own seperate IRA applications.
Spousal IRA:
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a- A type of IRA that is used to allow your spouse to prepare for
his or her's retirement years, as well. Part of the requirement is
that he or she has to be unemployed.
b- Eligibility will be met if you file a joint income tax return
with your spouse being eligible for a Regular IRA- and that you
are unemployed or have earned less than $25O during the year.
c- Opening a Spousal IRA, is just a matter of completing an IRA
application for yourself. An IRA is owned seperately and treated
independently by either spouse, whether it is a Regular or Spousal
IRA.
Rollover IRA:
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a- Ever hear of IRA roll-overs? What this means is that you can
"roll-over" (move) funds from one retirement plan, to another one.
This happens for example, when you leave a company and you have
received a payment from your former employer's retirement plan.
b- Generally, there is no limit placed on the amount that can be
transferred to an IRA and there is no tax on the amount that you
have transferred, because the money is only going from one plan to
another retirement plan.
c- You can only affect one roll-over per year from one IRA plan to
another.
d- Check with your retirement plan administrator, to find out the
proper procedures used to complete a roll-over.
Simplified Employee Pension IRA (SEP-IRA):
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a- Small companies often set this type of plan up for their
employees when the company has no other retirement plan in place.
b- A SEP-IRA plan allows the employer to make contributions to
your IRA plan. This type of plan is generally compared to the
Regular IRA rules in place with the exception of higher limits for
contributions.
c- Reviewing IRA Forms 53O5-SEP and 53O5A-SEP, will explain how
SEP-IRAs are regulated. Ask your small business employer to check
into this plan.
Some after thoughts:
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a- There seems to be a belief that there is no sense in actually
contributing to an IRA, since the deductions have been eliminated
by the tax reforms.
It is true that the deductions have been eliminated but you will
still accrue a compounded income tax-free savings until you begin
withdrawing on your account. A big plus, if you want to multiply
any unused funds into a larger savings account.
b- You need to show the IRS that the contributions made to your
IRA after 1986, were actually made after 1986. Since that money is
no longer tax-deductible, you may end up paying taxes on it a
second time if you don't keep accurate records.
c- The IRS allows you to close out your IRA and then open a new
IRA (with the same exact amount) within 6O days, without placing a
ten percent penalty plus ordinary income taxes, on your funds.
The problem with this is a possible unknown glitch, that would
prevent you from meeting the required 6O day limit set by the IRS.
4O1(K) plans:
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a- Under the old tax laws, you were allowed to contribute up to
$3O,OOO into this plan. Now, you are limited to $7,OOO.
This plan is still a good way to build up a tax-deferred savings,
because it is really considered as a kind of deferred compensation
plan. Therefore, you get the benefits of a double bonus as you
contribute to it. The reason for this is that, the contributions
that you make are deducted from your adjusted gross income,
thereby reducing your taxable income.
Advantages-
a- You can contribute more money into a 4O1(K) plan, then an IRA.
b- Many employers will match dollar for dollar the amount that you
elect to contribute into your 4O1(K) plan. Usually however, a
company will match your contribution on a percentage basis such as
75 percent or 50 percent for every dollar you put in. To put it
another way, they will add 75 cents or 5O cents for every dollar
you put in.
c- You usually can elect to have an escalating percentage of money
deducted (up to a point) from your salary to contribute to your
plan.
d- You have the benefit of these types of plans being managed by
professionals.
e- Unlike IRAs, you may be able to borrow from your companys' plan
with payments made back into your plan. This isn't always true for
every plan. Check with the administrator of your particular plan,
to verify if you can or can not. Also, check to see what
conditions need to be met for repayment, should you find that you
are no longer employed by your company.
f- Withdrawing money from your 4O1(K) plan for large medical bills
may allow some of the withdrawal, to escape the 1O percent early
withdrawal penalty. This is not allowed for IRAs.
g- If you decide to retire at age 55 say, you can withdraw your
4O1(K) funds without paying a penalty. You can't do that with an
IRA, because you have to obtain the age of 59 1/2 before you can
begin any withdrawals.
h- If you finally decide to make a withdrawal in one lump sum, you
may qualify for a 5 or ten year averaging break, that is not
available to IRAs.
CAVEAT(S)-
If you do decide to borrow from your plan, you must understand
that if you are laid off or otherwise unemployed by your company,
you will still have an outstanding "loan" balance due to your plan
and you may either have to pay the loan off completely, or by
your existing payment schedule.
You can elect to take a loss by rolling your plan balance into an
IRA if you wish and your plan permits that but the difference from
what your balance was before the loan and the remaining balance
will be considered as ordinary income and subject to income tax
plus a 1O percent penalty for early withdrawal.
KEOGH PLANS
Self-employment retirement plans:
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a- Keogh plans, have come through the tax reforms in relatively
good shape. A yearly tax-deductible self-employment contributions
of up to $3O,OOO or 2O percent of your income (which ever is less)
may still be made into certain defined contribution plans.
b- A defined-benefit plan (as you reach retirement age) may allow
you to contribute as much as is necessary of your self-employment
income, to insure a set income from your plan in retirement. You
should check with your tax adviser.
c- If you have employees, you must set up a Keogh plan for them as
well as your self.
d- Vesting schedules for company retirement plans, have been
accelerated to 1OO percent fully vested after five years for
your employees or gradually vested over a period of seven years,
beginning after the third year, at 2O percent annually.
e- It is not necessary to be fully self-employed in your own
business to qualify for a Keogh plan. Any self-employment income,
from a side-line business to free-lance and consulting fees, will
allow you to contribute up to the deductible limit in your own
plan.
Retiring abroad:
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a- Maintain your assets in US insitutions and forward your funds
as needed, to protect your dollar assets.
b- Maintain two wills. One will for your US assets and one will
for your foreign assets. This will prevent the possibilty of cross
claims internationally, that may complicate disposal of your
estate.
c- You will need health insurance abroad, just as you would at
home. Many countries have their own local insurance policies as
good as ours. There are also international health insurance
policies available.
d- Be advised that Medicaid and Medicare do not extend beyond our
boarders.
e- Check for countries that will let foreign residents take
advantage of their government run health plans. You may find that
the cost is little or non-existent.
Retire and still work:
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a- Working a part time job to supplement your Social Security may
not pay off in the long run. Here's why: When you add up your pay-
roll deductions, commuting costs and any job-related expenses, you
may find that for the time and effort, it just isn't worth it.
b- You can collect full Social Security benefits and still work
but your income will be limited, as set by the government. Beyond
this limit, you will lose one dollar ($1) in benefits for every
two dollars ($2) earned.
c- You may not be able to collect from your pension plan, if you
continue to work part-time for the same company. A way around this
if your company will go along with this, is to come back as a
freelancer or consultant. This makes you self-employed which won't
affect your pension plan.
d- Working as a consultant or a freelancer as in the above example
makes you self-employed. You can of course, simply start your own
business with its many attractive advantages (tax wise too).
Medicare:
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a- Guess what? You can get more out of Medicare than you might
think, but you must act quickly (within 3 months after your 65th
birthday) to apply for what is known as Plan B.
This is how Medicare generally works: When you reach the age of
65, Plan A is automatically instituted. This plan is a no-charge
in-hospital insurance plan.
Approximately four months prior to your 65th birthday, you will
be notified by Medicare to enroll in the Plan B option. You will
have within three months after your 65th birthday to respond to
this request. If you miss that time frame, you still have a annual
window (January 1 to March 31) enrollment period, in which to do
so.
Plan B is not free! There is a premium that will be deducted from
your Social Security check. Coverage includes: tests, doctor's
fees, nursing and home health care expenses. There is a deductible
for Plan B and it covers 8O percent of expenses.
CAVEAT(S)-
If you file late, there is a 1O percent increase in the Plan B
premium.
You are not covered if you become sick or injured while waiting
for the enrollment period.
Prescription drug expenses are not covered.
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