IRA Independent Religious Association

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IRA Independent Religious Association?
IRA I Ran Away?
IRA Immediate Roadblock Ahead?
IRA Individual Retirement Account?
SWIB and GFA present An interactive session
about IRAs and 401ks Monday, April 10th 1200
120 pm Room 3-60
Who is Roth and what is he doing with my IRA?
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You always knew Sternies were smarter...

• This event could also be called How to Outsmart
  Wharton MBAs in One Easy Hour
• If you didnt read the business section in
  yesterdays New York Times, youll find out why
  pretty soon.

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What well talk about

• What is a...
• Roth or Traditional IRA?
• 401k?
• IRA Rollover?
• Whats involved in getting one of these?
• Whats with all these fees?
• How do I research a mutual fund?
• What are some other investment options?

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Retirement? Im only 27!
Source www.vanguard.com
Too bad Dave did not attend this event.
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What is an IRA?

• An IRA (individual retirement account) is a
  tax-advantaged account that allows you to save
  for retirement. You put money in, choose
  investments, and they compound tax-free.
• You can open an IRA almost anywhere that you can
  open a brokerage account.
• Vanguard, Fidelity, and other mutual fund
  companies offer IRAs. So do brokerage firms like
  Schwab and Merrill Lynch, and banks like
  Washington Mutual.
• You dont need a lot of savings to open an IRA
  account - some places require as little as 50.

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What does tax-free compounding mean, exactly?

• Lets say you buy shares of some mutual funds.
  Over the years, you keep some holdings, sell
  others, and reinvest money where you choose.
  When you retire, the shares of your mutual funds
  are worth a lot more then when you started, and
  youve received plenty of dividends in the
  meantime as well.
• If you buy shares of mutual funds in a regular
  account, you have to pay tax on those dividends
  each year. Also, if you sell shares for more
  than what you paid, you owe capital gains tax on
  the difference.
• With these tax-advantaged accounts, you owe no
  tax while the money is in the account.

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This is why its so good
Source www.vanguard.com
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What are Roth IRAs and Traditional IRAs?

• With the Roth, you contribute after-tax money.
  With the traditional, you contribute pre-tax
  money (you get a deduction on your tax return).
• When you retire and take money out of a Roth
  account, you owe no tax. When you take money out
  of a traditional at retirement, you pay tax at
  that time. Money compounds tax free while
  sitting in both types of IRAs.
• Which is better? Generally, young people are
  better off with the Roth, because they are in a
  lower tax bracket now than they expect to be in
  when they retire.
• You can only make a contribution to one of these
  per year. If you contribute to a Roth IRA one
  year, you cant contribute to a traditional IRA
  in the same year.

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What are some other IRA rules?
Roth IRA
Traditional IRA
Rule
Same as Roth IRA, but tax deduction phases out
with coverage by an employer retirement plan
for people under 50 Max of 4,000 (for 2005 and
for 2006) or your earned income
Annual maximum contribution
No contribution limit, but deduction phases out
Single tax filing status - 95- 110K Married
filing jointly - 150-160K
... unless you make too much , then it phases
out. AGI limit is...
must be none
Age requirement to make contributions
sorry, the I stands for individual
Joint account with spouse
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More IRA rules...
Roth IRA
Traditional IRA
Rule
from 1/1 until 4/15 the following year. Theres
still time for a 2005 contribution!
When you can make a contribution
- Mandatory distributions at age 70.5 - Early
withdrawals generally trigger taxes and 10
penalty
- Contributions can be withdrawn tax-free with no
penalty at any time - Withdrawing earnings before
age 59.5 generally triggers taxes and a 10
penalty
Withdrawals
- Does not affect contribution limits - Deduction
phases out
totally separate from this type of account
Participant in an employer sponsored retirement
plan like a 401K
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Jane MBA opens a Roth IRA...

• She has done her research and wants to invest in
  an index mutual fund. Because she only has
  2,000 to invest (from her tax refund and signing
  bonus), she chose mutual funds, because this is a
  great way to be diversified with a small dollar
  amount and at a low cost.
• Since she is young, she wants a stock fund,
  because shes investing for the long haul and
  knows that bond returns historically have not
  beaten inflation. She knows that the SP500 is a
  broad-based stock index, and that many SP 500
  index funds have extremely low fees.
• Jane decides to open an account at Fidelity,
  because they offer some of the lowest fees in the
  industry. More on fees later. Fidelity charges
  a 10bp management fee on the Spartan 500 Index
  Fund. Vanguard charges 18bp for its 500 Index
  Fund.
• Fidelitys website says it takes 10-15 minutes to
  complete the online form to open an account, so
  Jane does this. She makes her younger sister the
  beneficiary on the account.
• She has money transferred from her checking
  account to Fidelity, and tells Fidelity to put
  her money in the 500 Index Fund.

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Thats it!

• Jane has her account open, and feels financially
  empowered. She celebrates her new responsible
  self by learning how to prevent identity theft
  and improve her credit score.
• woohoo!
• See articles
• The New Family Portfolio Manager Mom
• Reclaiming Your Identity
• Social Security Numbers Are Far From Secure

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What is a 401k?

• This is a tax-advantaged retirement savings
  account that your employer can choose to offer as
  an employment benefit. You have pre-tax money
  withheld from each paycheck for savings, and your
  taxable income is reduced by this amount.
• Investment options are determined by your
  employer, but generally include several mutual
  funds, and maybe the stock of your employer.
• Employers sometimes require you work there a
  certain period of time before you are eligible to
  contribute.
• Non-profit organizations and schools can offer a
  403b plan, which is similar to a 401k.

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Employer matching

• Some employers will match your 401k
  contributions. THIS IS FREE MONEY!!!!! TAKE IT!
  Employer matching is like earning a 100
  guaranteed return on your investment.
• If you cant afford to contribute the maximum,
  try to at least get the maximum employer match.
  For example, your company might match 50 of your
  contributions, up to 3 of your income. Youd
  need to contribute 6 to get the maximum match.
• Sometimes the employer contributions vest over
  a period of time. This means the money is not
  all yours right away, but becomes yours according
  to a vesting schedule. For example, if 20 vests
  each year for five years, and you leave after 3
  years, youd only get 60 of the match.

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Be careful to check your paystubs

• Make sure you understand how much is being
  withdrawn and where it is going.
• See story Theft From 401(k)s Is on the Rise

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What happens to my 401k when I leave my employer?

• You have a few options
• leave the money where it is
• withdraw the money for cash and pay taxes and 10
  early withdrawal penalty WORST OPTION
• do an IRA rollover BEST OPTION
• A rollover involves transferring the money from
  the 401k into an IRA account you control. All
  the places that offer Roth and traditional IRAs
  will welcome your rollover .

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How does a rollover work?

• A direct rollover (trustee-to-trustee) is
  easiest from your perspective. Your 401k sends
  money directly to the firm where you are opening
  the rollover IRA.
• Your company may only offer an indirect option,
  where they send you a check. In this case,
  instruct your company to make the check out to
  your rollover account. If they do, the check
  should be for the full amount.
• If your company sends you a check made out to
  you, it is probably for only 80 of the amount in
  your account. You have to send a check to your
  rollover account for 100 of the amount to avoid
  taxes and penalties.
• If the check comes to you, you have 60 DAYS to
  get that check to your new rollover account, or
  it is treated as a withdrawal.

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Why should I do a rollover?

• Your former employer could experience financial
  distress
• Your old company may merge and 401k governing
  rules may change
• You can obtain more investment options with a
  rollover IRA than most 401ks offer
• FINANCIAL CONTROL AND EMPOWERMENT!
• Avoid spousal consent rule for beneficiary
• See story Help in Tracking Down Lost or
  Orphaned 401(k)s

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Distribution Request Example
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Distribution Request Example, cont.
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How do I find the fees for a mutual fund?

• Read the prospectus, not just the brief summary
  materials
• Ask questions to find out about ALL fees
• See story Make Sure You Sweat the Right Small
  Stuff

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What kinds of fees are there for mutual funds?

• Annual management fee
• Front-end load and/or back-end load
• 12b-1 fee
• Annual account fees
• Dont pay more than you need to! (Thats what
  those Wharton MBAs did... See the story Same
  Portfolio, Higher Cost. So Why Choose It?

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Why are fees such a big deal?
Source www.vanguard.com
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What are some resources to research mutual funds?

• Morningstar and Value Line
• Fund company websites
• Surveys in Business Week, the Wall St. Journal,
  etc.
• See story Five Money Ideas That Really Add Up

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Morningstar example
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Morningstar example, cont.
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What are some other investment options?

• CDs
• Money market fund
• Bond fund
• Stock fund
• Annuity (see story When Putting Your Nest Egg
  Into an Annuity Makes Sense)
• Roth 401(k) (see story A High-Octane Roth Plan
  Beckons to High Incomes)

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Questions?

• Ok, heres one.
• Q Who is Roth?
• A William Roth was a Republican Senator who
  represented Delaware for five terms. He died in
  December 2003 at the age of 82. Although most
  well known for the Roth IRA, he sponsored many
  pieces of tax-related legislation, and oversaw a
  Pentagon overspending inquiry which uncovered the
  famous 9,600 wrench and 640 toilet seat.
• Now you know.