Pay Now or Pay Later: Rules for IRAs and Other Retirement Plans

Monday 2/9/2004


I’ve made some stupid financial mistakes in my life.  Being in financial counseling, I was able to see the error of my ways and make adjustments at an early age.  What is going to happen to the Boomers who never quite ‘get it’ – and then try to retire?

Every day, the majority of Baby Boomers are making bad financial decisions – or ignoring the future in favor of the present.  Deferred gratification is a foreign concept to many Boomer – and they will pay a big price for that when they try to retire. 

Try is a key word here.  So many people are duped by their perceptions of what is going on around them financially.  Everyone uses credit cards, they say.  Or Mom and Dad did fine in retirement and so will I.  Or I have $750,000 in my retirement plan, I’ll be fine – just how much will that buy you in retirement income!?  Not as much as you’d think.  About $2500 a month.  Can you live on that?  Will you draw down too much and end up running out of money at age 72?  That’s what I’m seeing - people without any real knowledge of how money works trying to go it alone and ending up impoverished.  They feel cheated – but really they cheated themselves by retiring too early, not saving enough money not using the tax loopholes – like IRAs and 401ks - to the max and by not getting good financial advice.  Tune in tomorrow for info on the new IRA rules.  You can still cut your taxes and make a contribution for last year by April 15th.

There is always a more pressing need for the money – it seems.  Writer Daymon Runyon said “Life is tough, and it’s really tough if you’re stupid.”  Don’t let that be you.


Tuesday 2/10/2004

Who can contribute to an IRA?


The traditional IRA is available to millions who do not use it.

You should consider a traditional, deductible IRA if you:

Here are some of the rules:

  1. You must be under 70½
  2. You must have earned income – compensations from work or self-employment
  3. You can contribute up to 100% of compensation or $3000 whichever is less. 
  4. If you are over 50 you can contribute up to $3500
  5. If you are in a retirement plan at work you can only contribute if your Adjusted Gross income – the number on the bottom of the front of your 1040 – does not exceed certain numbers – those numbers are about 40,000 singles and 60,000 married – check with you accountant or your income tax software for your eligibility. 
  6. If you do not have a retirement plan at work, you are eligible to higher income numbers – about 95000 single and 150000 married.  Check with your advisor.
  7. You can make a contribution for last year up until April 15th.  No extensions.
  8. You can start taking distributions at 59½.  
  9. You must start taking distributions at 70½.  The Rules for Roths are very different – tune in tomorrow.




Wednesday 2/11/2004

The rules for who can have a Roth IRA are very liberal – you probably qualify.


Who should have a Roth IRA?
You want to:

Here are some of the rules:

  1. There is no age limit for a Roth IRA – you can be 65 and still contribute
  2. You must have earned income or net self-employment income at least equal to the contribution.  Does that sound unlikely?  Earned income at 70?  I was talking to someone the other day who said her mother worked until 100.  Fancy that!
  3. You can contribute up to 100% of compensation or $3000 whichever is less. 
  4. If you are over 50 you can contribute up to $3500
  5. Non-earning spouse can contribute the same
  6. Contribution is reduced by any amount contributed to a traditional – deductible – IRA for the same year.
  7. Contributions are NOT tax deductible
  8. Must be set up and funded before your tax filing deadline of 4/15 – no extensions
  9. Maximum income for contributions:
    1. Singles - $95,000 - $110,000
    2. Married - $150,000 to $160,000
    3. Conversions - $100,000 single or married
  10.  Tax and penalty free after 59½
  11.  No required minimum distributions at 70½ - or ever.

What is the value of tax-free money in retirement? Ask some retired friend who accumulated a lot of money under the old rules.  Everything they get is taxed!  They are paying more in retirement as successful retirees than when they were working. 

I think everyone who qualifies should have a Roth IRA.



Thursday 2/12/2004

403(b) – what is it, who can use it and when must it be funded?


A non-ERISA 403(b) is what we are talking bout here.  If you work for a non-profit organization or a college, you may have an employer funded 403 (b) plan.  Like at Syracuse University.  Their pension plan is a Tax Sheltered Annuity with TIAA CREF.  That is an employer sponsored 403(b) plan.  You can still make contributions, but their benefits office will do the calculations for you as to how much you can contribute.

For other non-profits and for public school teachers we are talking here about your personal contributions to a non-employer paid 403(b). 

Some of the rules:


Friday 2/13/2004

There are a lot of pension plans to choose from if you are self-employed


SEPs, SIMPLEs, Keoghs, Owners 401k - what makes the most sense?  I’ve been designing pension plans for decades and it is not and easy answer.  Right now, many self employed people are amending their SEP or Keogh into an owners 401k.  They can usually double their contributions that way.  Owners 401k (where you work alone or with another family member) must be set up in the year you earned the income. Same with a SIMPLE plan.  Both of these are excellent pension choices in the right circumstances.

If you need a pension deduction this year for last year and you don’t yet have a plan set up - you must use a SEP or Keogh plan to be able to make contributions between January and April 15th for LAST year.  These plans are limited to a % of your income net of business expense – 20% if you are an unincorporated business.  If you have employees you must contribute for them, too, unless you build in some eligibility restrictions – like a 2 year wait and age 21.

If you set up a SIMPLE plan last year before October 1 you could still make your 3% matching contributions this year. 

If you are not planning to put in a large amount of money – you may just want to use an IRA – unless your income is too high.  IRAs set income limits at 100,000 to 150,000 depending on marital status.  Regular pension plans have no income limits. 

An owners 401k would let you contribute up to $41000 this year.  Maybe your budget needs some work to find that amount of money?

If you missed out for last year the time to plan for this year is – you guessed it – NOW.




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Monday 02/09/2004 Pay Now or Pay Later: Rules for IRAs and Other Retirement Plans

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