Maryland Annuity Resource Ultimate Guide to Retirement
Maryland Annuity Resource has put together an Ultimate Guide to Retirement using Annuities and IRA’s in Maryland, Washington D.C. and Virginia. Individual Retirement Accounts have rules and you must follow them to reap the benefits of IRA’s. We believe that having an IRA in addition to a 401(k) is a staple to any investment portfolio but only offer Annuities as the underlying investment.
The three letters IRA stands for Individual Retirement Account. What an IRA account actually is a government creation to allow companies to shirk the responsibility of disappearing pensions. IRA’s are basically a savings account making it an ideal way to save money for retirement with the added benefit of tax breaks come tax time. Many people think that the term IRA itself is actually an investment, but it is just an account where one can purchase an underlying investment like annuities, stocks, bonds, and mutual funds. We only offer Annuities as investments because the latter have the potential for loss of initial principal no one should lose money, especially when it comes to retirement savings.
There are some differences to IRA’s in that you open them yourself and maintain the account with the bank, brokerage house or insurance company. A 401(k) is an employer sponsored plan and is offered by the company you work for. Some different types of IRA’s to consider are the traditional IRA, SEP IRA, ROTH IRA, or even Simple IRA’s.
There are rules and guidelines that have to met to even be eligible for these types of IRA’s. Not everyone is eligible. Each underlying investment strategy does have limitations and no plan is perfect while no company offering plans is perfect either. Each type of qualified IRA plans have contribution limits and various other restrictions to follow, or there will be tax penalties imposed by the IRS. We offer only Annuities as underlying investments and them in itself have restrictions as well.
Opening an IRA is an important choice, so please read and do your homework on which type and investment you understand and is right for you.
The biggest difference between a Roth IRA and any type of Traditional IRA is when you actually have to pay taxes. With most types of traditional IRA’s you will have to pay taxes on earning when distributed for retirement. However you can get tax breaks now for contributions to your plan in this tax year but you have to follow the rules. Roth IRA’s are the complete opposite as there are no tax breaks in this tax year, but when it comes to distributions when you retire, they are normally tax free. In both types of accounts, the deposits do grow tax free and tax deferred, but with traditional IRA’s distributions are taxed as ordinary income.
Another difference is anyone with earned income can contribute to a traditional IRA, while there are income limits and rules to meet eligibility for opening and contributing to a Roth IRA account. There is a little more flexibility with Roth IRA accounts where there are qualifying events that allow early withdrawals but have to meet strict guidelines. You can leave the money in a ROTH IRA for as long as you want, letting it grow and compound for as long as you want, but with a traditional IRA, you would have to start RMD (required minimum distributions) by the time your are a ripe old age of 70.5 years old.
The best reason to open an additional IRA in addition to your 401(k) plan is basically the tax breaks for additional contributions. Currently the limit for contributing to your 401(k) in 2013 is 17K. That equates to a reduction of payroll taxes and other taxes of that portion of your income. If you opened another traditional IRA, your current contribution limits are 5K. If you add them both together, you are looking at tax breaks for the first, last, or middle 23k of earnings each year. With each plan there is tax deferral and interest compounding that take place and that my friend is the secret to earning enough to retire.
There are some considerations for contributing funds for each plan, but if the money is in your wallet, it is as good as gone. If you give the money to your wife, she would put it in her savings account and tell you she spent it. Well that is just a little humor but saving for retirement is serious and you should look at all plans and avenues to save for retirement.
If you are under the age of 70.5 and either you or your spouse earn income that is taxable, either one of you can contribute to a traditional ira.
There are some rules to determine if those contributions are tax deductible and here are some guidelines that change each year but you can find the changes on the IRS website. Currently you can find the contribution limits and income guidelines here. If you meet these guidelines, you can and will receive deductions for those contributions.
It is amazing to me that the government does not want you to save too much money. It almost seems like they never want you to retire.
Your money is always your money, however if you deposit funds into an IRA and are looking to withdrawal those funds before you are 59.5 years old, you will be accessed a 10% penalty on any amount that you take out. In addition to the penalties, you will be taxed on that amount as ordinary income. Having an Annuity as an underlying investment does not give you a free pass for withdrawals either. Especially if your annuity is an IRA annuity or qualified plan.
You can usually make penalty-free withdrawals (known as “qualified distributions”) from any IRA as long as your age is 59.5 or older. However you will still have to pay income tax on distributions if it is coming from a traditional IRA. Roth IRA’s are a little bit different as the account has to be at least 5 years old and 59.5. Annuities have 10% withdrawal provisions and are taxed on a LIFO basis, so remember your options and think about your tax implications when planning withdrawals.
For the life of us, we cannot tell who or why the government thinks that 59.5 is the magic age for all distributions but it is. It is like something happens when you are 59.5 and that is when all of these crisis events are going to happen so we better make a rule to give people access to their money. Anyway there are some rules and ways to gain access to your money penalty free as long as they are:
There is also oops I changed my mind provision that allows you to take back a contribution you made that year as long as you do it before the tax deadline. Granted you are also not allowed to deduct a contribution that you took back either. There are also rollovers that allow you to move money from one type of account to another type of account usually within 60 days and are not liable for taxes or penalties.
In case of emergencies there is a provision called substantially equal periodic payments that allows you to take distributions that the IRS will allow but once you start the payments, they have to continue until you are 59.5 or 5 years have passed since payments have started. If you change your mind and stop the payments, yes the IRS will access 10% penalties retroactively since the payments began. So the best rule of thumb is to not even think about your retirement nest egg as accessible cash until you retire.
No one including your employer, your mother, your father, or even the IRS can dictate to you how to choose the underlying investment in your IRA. In many plans you will options for choosing stocks. Hey that is great if you like stocks, understand how they work and can make money using stocks that cannot lose value. You might even have mutual fund choices and that is great if you are a mutual fund guru and know how society will react to certain events and outside forces until you retire. You might even have a cash option and we think that is great but over time the dollar does go up and down so plan your retirement when the dollar is at its peak.
We however choose Annuities as the underlying investment of out traditional IRA’s. Why you ask? The biggest most important reason of all is that annuities do not lose value. Once interest is credited inside an annuity, its value cannot go down. Annuities have exposure to the upside of markets and indexes but not the downside. Annuities have contractual guarantees to either credit interest gains or stay the same, but with a minimum guaranteed contract value at all times. Some annuities have a short option called an inverse performance trigger that actually pays when the markets and indexes show a loss or have a negative growth. On top of all that, Annuities offer a form of asset protection that only annuities can offer. That is why we choose annuities.
For more information about Individual Retirement Accounts and Retirement, click here.