“I am the master of my fate,
I am the captain of my soul.” – Invictus, William Ernest Henley
The 1935 Social Security Act signed into law by President Franklin D. Roosevelt was a game changer in this nation. Having witnessed the devastation caused by the great depression, the Act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. By signing this Act on August 14, 1935, President Roosevelt became the first president to advocate federal assistance for the elderly.
Fast forward to the 21st Century; our relationship to Social Security has changed drastically. Most Americans realize that Social Security as our grandparents knew it, may not be around or may be materially different by the time we are eligible to receive it. As a result, as a prudent wealth builder, you should proceed as if Social Security will NOT be available.
So how would you save for retirement as if there were NO social security available to you?
Take your retirement into your own hands!
Education:
I love America! I love this country because you can be anything that you want to be, including wealthy. There are no barriers to creating wealth for yourself to enjoy now or in your retirement years. The only problem is that many people don’t take advantage of the information available to them to better their situation. Today’s lesson is about taking your retirement into your own hands. One of the products that will enable you to be the master of your fate and the captain of your soul is the INDIVIDUAL RETIREMENT ACCOUNT (IRA). The two type of IRAs are the Traditional IRA and the Roth IRA.
Traditional and Roth IRAs
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
| Features | Traditional IRA | Roth IRA |
| Who can contribute? | You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. | You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts. |
| Are my contributions deductible? | You can deduct your contributions if you qualify. | Your contributions aren’t deductible. |
| How much can I contribute? | The most you can contribute to all of your traditional and Roth IRAs is the smaller of:
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| What is the deadline to make contributions? | Your tax return filing deadline (not including extensions). For example, you have until April 15, 2013, to make your 2012 contribution. | |
| When can I withdraw money? | You can withdraw money anytime. | |
| Do I have to take required minimum distributions? | You must start taking distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years. | Not required if you are the original owner. |
| Are my withdrawals and distributions taxable? | Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. | None if it’s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. |
Tax Planning Tip – (When to contribute to a Traditional IRA or a Roth IRA.)
- Traditional IRA (Pretax contributions)
- High tax bracket years
- Money is not needed within a five-year window
- Roth IRA (After-tax contributions)
- Make contribution if you are in a low tax bracket
Advantages of IRA Accounts:
- Ability to invest in a variety of assets – other plans like 401(k)s are limited to mutual fund types of investment. The IRA will enable you to invest in almost any type of asset including gold, other businesses, etc.
- Allows rollovers from other qualified retirement plans (term will be discussed in the next lesson).
- Earnings grow tax free (Roth IRA only)
- Distribution allowed to pay for qualified education expenses or medical expenses.
- Easy setup – virtually no administration involved.
- Offered by nearly all financial institutions.
Disadvantages of IRA Accounts:
- No loans are permitted.
- Cannot rollover to a 401(k) type plan.
- Traditional IRA and Roth IRA (other than rollover IRAs) may be subject to creditor claims, including IRS levies.
- Subject to early distribution penalties, unless exception applies.
- Required Minimum Distributions (Traditional IRA only)
- Fees
Resources:
RothIRA.com – Online resource to help investors understand Individual Retirement Accounts.
Important terms from this lesson:
|
Term |
Definition |
| Individual Retirement Account (IRA) | An investing tool used by individuals to earn and earmark funds for retirement savings. |
| Traditional IRA | An individual retirement account (IRA) that allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors. |
| Roth IRA | An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. Similar to other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal. |
Education and Action 