Retirement planning is not an easy job these days. You get advice from advisors, stockbrokers, bankers, attorneys, and accountants; everyone is trying to tell you that their plan is the best one.
I will divide retirement plans into groups, so that it will be easier for you to remember which plan does what for you. Let's begin with plans that I refer to as "Mickey Mouse Plans," not because they aren't effective, but because of the amount of money you can contribute to them each year. In 2005, you are limited to a maximum contribution of $3,000. If you are married and your spouse does not work, he or she can also contribute $3,000. This is the Individual Retirement Account, or IRA. This Mickey Mouse Plan comes in two flavors: the "vanilla IRA," and the "Roth IRA." They differ on the tax treatment. Let me take a moment to explain.
When you are dealing with any investments in a retirement plan or elsewhere, the tax implications play a very important role. With that in mind, we need to remember dear old "DAD." No, this is not your papa. This dad deals with your money. The first "D" refers to the "deposit." How is your deposit dealt with, tax-wise? Is the deposit with after-tax dollars or before-tax dollars? The "A" is the "accumulation." Is the interest earned taxable or tax-deferred? The last "D" is for "distribution." Are the dollars distributed taxable or tax-free? At best, you can get a tax break on two out of these three.
Now, let's see how DAD works with the IRAs. The vanilla IRA gives you the ability to deposit dollars before taxes. The Roth dollars are deposited after you pay taxes on them. Both plans allow the dollars to accumulate, sheltered from current taxation. When distribution takes place, the vanilla IRA dollars are now taxable as ordinary income. The Roth dollars come out tax-free. See, just two tax breaks for each plan. No plan allows for sheltering on the dollars in both directions! Another reason I refer to these IRAs as Mickey Mouse Plans is because you will never be able to accumulate enough money in them to retire and stay retired.
The next set of plans that you can use I call "Mighty Mouse Plans." They allow up to $40,000 as of this year. These include Simplified Employee Pension Plans (SEPPs), Pension and Profit-Sharing Plans, and any other qualified plans. You can exclude some employees if they are too young or if they are only part-time, except those cannot be excluded in SEPPs. The tax treatment on these plans is the same as the vanilla IRA. The deposit goes in before taxes and comes out as taxable income. Since they are qualified plans, you must make sure that they stay qualified, based on any changes that come about; based on what has been happening with plans, you can expect changes almost every year. Since Uncle Sam allows you to put away more money, there are also additional rules that you must follow.
There is another type of plan that I refer to as the "Mighty Hulk Plans." These plans are not "qualified" plans, and the tax treatment is the same as the Roth IRA. Your deposit is after taxes and the distribution is tax-free. They differ from Roth IRAs in that the deposit is unlimited. You can put in as much as you want. You can take money out at any time and use it for whatever you like, without any tax consequences. Another plus is you are not required to make any deposits for any employees. Want to draw a retirement income at age 50? Now you can! In most states, the money within these plans is protected from creditors or lawsuits. You have lots of flexibility. You can also combine the Mighty Hulk plans with any other plan. For the most part, you cannot do that with a combination of the other plans. Want a tax-free retirement plan that will exceed your current income? With these plans, you can accomplish that.
I could spend the next month trying to cover all of the "where is" and "why for" in all of these plans, but I am sure all that would do is give you a mighty headache! I hope that I have given you enough information to make you realize that you need to know more about all of the various plans that are available to you.
Will you ignore my comments and sing the "M-I-C-K-E-Y" song, or will you look up in the sky and seek out a Mighty Mouse plan? Don't forget that you have another hero you can call on: Hulk. Yes, the Hulk can also come to help you rescue some big bucks. Keep in mind that all of these plans deal with dollars over a long period of time. Make sure you fund them with dollars you won't need next year, or for the next few years. Do not consider signing on any dotted line until you have viewed these plans in the context of an overall financial plan. With that in mind, it is now time to sit back and decide which "hero" will champion your cause!
Stanley Greenfield, RHU
1829 Green Heron Court
Jacksonville Beach, Florida 32250
(800) 585-1555
Fax: (904) 247-1266
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