Retirement Retirement PlanningPlanning

How to Become a Millionaire!How to Become a Millionaire!

Investing for RetirementInvesting for Retirement

We are going to discuss different We are going to discuss different investing tools that individuals can use to investing tools that individuals can use to help prepare for their retirement.help prepare for their retirement.

These include: 401K’s (Traditional and These include: 401K’s (Traditional and Roth), 403 B’s (Traditional and Roth) and Roth), 403 B’s (Traditional and Roth) and Individual Retirement Accounts Individual Retirement Accounts (Traditional and Roth).(Traditional and Roth).

401K (Traditional)401K (Traditional)

This is an employer sponsored retirement plan This is an employer sponsored retirement plan that is funded through payroll deduction.that is funded through payroll deduction.

Traditional 401K’s are funded with pre-tax Traditional 401K’s are funded with pre-tax dollars. This means that the amount that you dollars. This means that the amount that you contribute to your 401K reduces your taxable contribute to your 401K reduces your taxable income for that year.income for that year.

Many employers match a percentage of their Many employers match a percentage of their employees contributions to their 401K’s. This is employees contributions to their 401K’s. This is one of the most significant employee benefits one of the most significant employee benefits that employers offer their employees.that employers offer their employees.

Individuals pay tax on their 401K when they Individuals pay tax on their 401K when they begin making withdrawals. It is treated as current begin making withdrawals. It is treated as current income for tax purposes.income for tax purposes.

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Individuals may begin making withdrawals (without Individuals may begin making withdrawals (without penalty) when they reach 59 ½ years of age. penalty) when they reach 59 ½ years of age. Individuals must start making withdrawals when they Individuals must start making withdrawals when they reach 70 ½ years of age. reach 70 ½ years of age.

If money is withdrawn from the account before the If money is withdrawn from the account before the individual reaches 59 ½ a 10% tax penalty must be individual reaches 59 ½ a 10% tax penalty must be paid.paid.

An employee is always fully entitled to the portion of An employee is always fully entitled to the portion of their 401K that they fund. An employee becomes their 401K that they fund. An employee becomes “vested” or entitled to the employer’s matching “vested” or entitled to the employer’s matching contribution with a designated number of years of contribution with a designated number of years of service. service.

An employee is currently allowed to contribute $16, An employee is currently allowed to contribute $16, 500 into their 401K.500 into their 401K.

401K (Roth)401K (Roth)

This is an employer sponsored retirement plan that is This is an employer sponsored retirement plan that is funded through payroll deduction.funded through payroll deduction.

Roth 401K’s are funded with after-tax dollars. This Roth 401K’s are funded with after-tax dollars. This means that the amount that you contribute to your means that the amount that you contribute to your 401K does not reduce your taxable income.401K does not reduce your taxable income.

However, both the amount that is invested in the Roth However, both the amount that is invested in the Roth 401K and any amount that the account earns is 401K and any amount that the account earns is completely tax-free when the money is withdrawn at completely tax-free when the money is withdrawn at retirement.retirement.

The same rules apply to Roth 401K’s, as Traditional The same rules apply to Roth 401K’s, as Traditional 401K’s, concerning contribution limits, employer 401K’s, concerning contribution limits, employer matches, early withdrawals, and vesting.matches, early withdrawals, and vesting.

403B (Traditional and Roth)

These are employer sponsored retirement plans that operate similarly to 401K’s.

403B’s are for individuals that work for non-profit organizations or in the public sector.

Individual Retirement Individual Retirement Account (Traditional)Account (Traditional)

This is a retirement accountThis is a retirement account that allows that allows individuals to set aside money each year individuals to set aside money each year on a pre-tax basis. on a pre-tax basis.

If certain income requirements are met, If certain income requirements are met, the amount (or a portion) of your the amount (or a portion) of your contribution can reduce your taxable contribution can reduce your taxable income for the year that the contribution income for the year that the contribution is made.is made.

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Taxes are paid on the contributions and Taxes are paid on the contributions and earnings when the money is withdrawn for earnings when the money is withdrawn for retirement.retirement.

The same rules for withdrawals apply to The same rules for withdrawals apply to traditional IRA’s as with traditional 401K’s.traditional IRA’s as with traditional 401K’s.

The current amount that an individual may The current amount that an individual may contribute to an IRA is $5000 per year.contribute to an IRA is $5000 per year.

Individual Retirement Individual Retirement Account (Roth)Account (Roth)

This is a retirement account that allows This is a retirement account that allows individuals to put money aside for individuals to put money aside for retirement on an after-tax basis.retirement on an after-tax basis.

The amount that is invested in a Roth The amount that is invested in a Roth IRA, and any amount that the account IRA, and any amount that the account earns, is completely tax-free when the earns, is completely tax-free when the money is withdrawn at retirement.money is withdrawn at retirement.

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Unlike a traditional IRA, You can withdraw your contributions without penalty at any time.

You can begin making penalty-free withdrawals of earnings if you are at age 59½ and if your account has been open for at least 5 years.

Unlike a traditional IRA, there is no mandatory age that you must begin making withdrawals from your account.

The current amount that an individual may The current amount that an individual may contribute to a Roth IRA is $5000 per year.contribute to a Roth IRA is $5000 per year.

Words of Wisdom!

Take full advantage of 401K’s/403B’s at work! Make sure that at the very minimum that you are contributing a percentage of your income equal to what your employer will match.

Pay attention to the rules for “vesting” at your place of employment. It may be worth staying at the place of employment for additional time to enjoy the benefits of the employer’s contribution to your retirement account.

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The Roth retirement accounts are quite possibly the greatest financial gift that government legislation has ever created (Thank you Senator William Roth!).

Remember when we talked about compounding interest and the time value of money. Roth accounts allow you to enjoy this without ever paying a penny in tax on the earnings!

If you start investing in these accounts early enough, you can not only retire as a millionaire (or multi-millionaire) you can do so without paying taxes on your fortune!

The key is to start early and continue to contribute on a regular basis into your retirement accounts!

Compound Growth with a Roth IRA

We are going to take a look at a Roth IRA retirement calculator and a graph that will demonstrate the potential for tax-free growth.

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