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Retirement Saving Options to Consider

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When it comes to retirement savings, you have options to consider. Here is a list of some of those options and information that can help you make the best decision. It’s USC Credit Union’s goal to be your financial partner for life and to empower you to own your future. Let’s get started!

Traditional IRA
An IRA is an Individual Retirement Account. Deposits to a traditional IRA are not taxed and your contributions will grow “tax-deferred,” meaning you will pay taxes on the money when you withdraw it.
• Income limits: Anyone with earned income (younger than 70½) can contribute.

• Tax-deductible? Yes, on both state and federal returns for the year you make the contributions.

• Withdrawals: Qualified distributions can begin at 59½, but the first distribution cannot occur until
five years after the first contribution. Also, contrbutions (but not earnings) can be withdrawn penalty- and tax-free anytime.

• Required Minimum Distributions (RMDs): Begin at age 70½ 

Roth IRA

Contributions to a Roth IRA are not tax-deductible,but when you withdraw the money, you won’t have to pay taxes on it.

• Income limits: Anyone with earned income (younger than 70½) can contribute. Single tax filers and married couples filing jointly have differing adjusted gross income level limits.

• Tax deductible? No

• Withdrawals: Qualified distributions can begin at 59½, but the first distribution cannot occur until
five years after the first contribution. Also, contrbutions (but not earnings) can be withdrawn penalty- and tax-free anytime.

• Required Minimum Distributions (RMDs): None.

(Which type of account is best for you dependson several circumstances, so it’s best to talk to a financial advisor for advice specific to your financial situation. For additional information on the differences between a Traditional IRA and a Roth IRA,visit (rothira.com/traditional-ira-vs-roth-ira).

Here’s a look at the IRA accounts of three investors.See what a difference your starting age makes on your retirement income at age 65.

Susan, Jeff and Steve each saved the maximum amount allowed during their contribution years –
$5,500 a year -- and lived to age 90.

Retirement-1

The differences in monthly incomes are significant. In fact, Susan’s retirement income is almost four times as high as Steve’s. The benefits of saving early can’t be overstated!

401(k)
These are defined contribution savings plans offered by employers. Your contribution is deducted directly from your paycheck and deposited pre-tax, which actually lessens your taxable income and therefore your taxes. Your employer may match a portion of what you save. (Each employer is allowed to set their own limits as to how much they’ll match and many set minimums on how much you need to contribute before they’ll match it.) This is FREE money! Be sure to read the fine print on these accounts because at many companies, you need to remain employed there for a certain period of time (this is called vesting) before you get to keep the matched money

• Contribution limits? Yes, set by the IRS. In 2013, for those under 50 years of age, the max was $17,500, for those over 50, $23,000. Check yearly for limit modifications. Employees over age 50 can also make “catch-up contributions” up to a certain amount above and beyond the maximum amount.

• Tax-deductible? Yes

• Withdrawals: You can begin taking money from your account at age 59½ without incurring an early withdrawal penalty. Laws governing 401(k) plans require you to begin withdrawing money from your plan by the age of 70½, unless you are still a full-time employee with the company sponsoring your 401(k). All distributions are considered income and are subject to income tax.

As mentioned previously, on top of free money and automatic savings, contributing to a 401(k) offers you great tax breaks. Consider this scenario:

RetirementCal

Both David and Gary make $30,000 and are in the 30% tax bracket. David chooses not to contribute to his 401(k) one year, and has a tax liability of $8,400. Gary, on the other hand, contributed $3,000 toward his retirement, thereby reducing his taxable income by $840. Not only does Gary have less of a tax payment that year, but he also has $3,000 in his retirement fund. It’s a win-win situation for Gary. Similar accounts to consider:

• 403(b) Plans are offered to employees of taxexempt or non-profit organizations, such as public schools, colleges, hospitals, libraries, philanthropic organizations and churches.

• 457 Plans are offered to employees of state and local municipal governments (and some local school and state university systems).

• Thrift Savings Plans are offered to federal civilian and uniformed services employees.

 

To learn more about retirement, download our free eBook or visit our website.

USC Credit Union Retirement eBook

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