MISCELLANEOUS TOPICS
Retirement Accounts, Regular Accounts,
and Annuities
Why? ’Cause ya’ gotta’ put yer money somewhere!
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Regular Taxable Accounts versus
Retirement Accounts
Bonds “Cash”
Stocks Options
Futures
Margining
Real Estate
Mutual Funds Shorting
Bonds
Stocks
“Cash”
Mutual Funds
Taxable Account
Retirement Account
Regular account
IRA, 401(k), 403(b), Roth IRA, etc.
No limit on contributions
Strict limits on contributions
No limits on investment types
Strict limits on investment types
Pay taxes every year
Tax-deferred (Roth IRA – tax-free)
Although there are many subtle and not-so-subtle differences, the
major differences are how they are taxed by the IRS, how much
money you can contribute, and what you can have in the account.
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Types of Retirement Accounts

Pre-tax Contributions




401(k), 403(b) for private & public employees
Traditional IRA for everyone
SEP-IRA, SIMPLE IRA, Keogh for self-employed
Tax Break Now
 Deduct contributions from income tax
 Pay Taxes in Retirement

Post-tax Contributions
 Roth IRA for (almost) everyone
 “Roth 401(k),” “Roth 403(b)”
 Tax Break Later
 Tax-Free in Retirement!
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Individual Retirement Arrangement
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“What? I thought it stood for Individual Retirement Account!?”

The most popular personal retirement plan
 Now referred to as the “Traditional IRA”
 Anyone with earned income can contribute to a
Traditional IRA
 Contributions are normally tax-deductible (“pre-tax”)
 Unless you have a retirement plan at your employment
and make over a certain amount
 Contribution limits are increasing
 Investment grows tax-deferred
 You pay taxes on the money as you withdraw it once
you are retired
 Normally, after 59½ years of age
 Mandatory withdraws begin at age 70½
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And the IRA’s Many Cousins…
401(k) – corporations and other businesses
 403(b), 457, 401(a) – public organizations
 SEP IRA – self-employed, small business
 SIMPLE IRA – self-employed, small business
 Simple 401(k) – self-employed, small business
 SAR SEP – self-employed, small business
 Keogh – self-employed, small business
 Roth IRA – “post-tax” contributions

 Now “Roth 401(k)’s” – “Roth 403(b)’s”
They all work very much like the Traditional IRA except for
the Roth IRA, “Roth 401(k),” and “Roth 403(b).”
A Pre-tax Contribution Lowers Your
Taxes Now Example: 401(k), 403(b), Traditional IRA
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You contribute via your paycheck: $100
Your Federal tax withholding is lowered by:
$25
Your California tax withholding is lowered by:
$8
Total government subsidy:
$33
Your take home pay is only reduced by:
$67
But the whole $100 still goes into your account
“So What is the Catch?”

You pay income tax on any amounts
withdrawn in retirement
 But people in retirement are usually in a
lower tax bracket
 If not, Congratulations!

If you withdraw the funds before retirement…
 You pay the income tax, and
 You pay a 10% penalty
 Exceptions for first home purchase ($10,000),
higher education, medical disability and
financial hardship (hard to get accepted by IRS)
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A Post-tax Contribution Gives No Tax
Break Now Example: Roth IRA, “Roth 401(k)”
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You contribute to a Roth IRA: $100
Your Federal tax withholding is lowered by:
$0
Your California tax withholding is lowered by:
$0
Total government subsidy:
$0
Your disposable income is reduced by: $100
So Why Contribute to a Roth IRA?
“Because a Roth IRA is So Cool!”

Tax-Free in Retirement is a Golden Opportunity
 No other investment choice comes close
 Eventually, they will probably be gotten rid of

Plus, you can withdraw the contributions at
any time with no penalty
 You have already paid tax on the contributions
 This makes the Roth IRA also an excellent
intermediate-term investment account
 Purchase of a house or other high-ticket item
 Great for college expenses
 Currently not used in Financial Aid calculations
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But a Roth IRA is Not for Everyone

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Limitations on Roth IRAs Contributions
 Only single taxpayers with an AGI of $110,000 or
less and married couples with an AGI of $173,000
or less in 2012 can fully contribute to a Roth IRA
 If you don’t qualify, Congratulations!
 But you can contribute to a Roth IRA anyway
 If you find that you have made over the limit, you
can “recharacterize” the contributions into a
Traditional IRA (which does not have the same
limitations) before you file your taxes
 And then you convert the Traditional IRA to a Roth
 I know. I know. Who voted for these bozos?
 Oh, yeah. We did…
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IRA / Roth IRA Contribution Limits
Year
2012
Under 50
5,000
Age 50 and Over
6,000
Contributions are limited to the lesser of your gross salary or the
maximum yearly contribution. If you make at least $5,000 in any
year, you have until April 15th of the next year to put the maximum
into a IRA or Roth IRA. Your spouse is also eligible for contributions
even if he/she does not work.
401(k), 403(b) Contribution Limits
Year
2012
Under 50
17,000
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50 & Over
22,500
Contributions are limited to the lesser of your gross salary or the
maximum yearly contribution. (Same rules as Traditional IRA / Roth
IRA.) In other words, if you make $17,000 in year 2012, you could put
your entire income into a 401(k) or 403(b) or 457. These amounts are
now indexed to inflation and go up over time. There is a loophole in
the law that allows those in the public sector to “double contribute”
$17,000 into a 403(b) and $17,000 into a 457 – or $22,500 and
$22,500 if you are 50 or over!
Tax Credit for Low Income
Earners
 Up to 50% of contributions
 Maximum of $2,000
 Based on Adjusted Gross Income
 $28,750 or less – single filers
 $57,500 or less – married filing jointly
 $43,125 or less – head of household
 Reminder: A tax credit is a dollar for dollar
reduction of income taxes
If you do your own taxes, do not forget this. If you have someone
do them, make sure to remind them you put money away in a
retirement account. TurboTax handles these well.
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“Roth 401(k)” / “Roth 403(b)”
 If your employer offers the option, you are
able to place after-tax dollars into your
401(k) or 403(b) accounts
 Just like a Roth IRA
 Employer matches will continue to be pre-tax
contributions
 However, contributions are not able to be
withdrawn without penalty or taxes until
retirement (unlike a Roth IRA)
This is a great option for those who do not need the tax
break now. However, unless your employer offers matching
contributions, I prefer the Roth IRA.
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What is an Annuity?

An annuity is a life insurance product
designed to provide a guaranteed income
 Annuity options include income for a set number
of years, for as long as you live, or for as long as
you and your spouse (or other dependent) lives if
he or she outlives you
 The amount you get is based on which of the
above options you pick, how much you have
contributed, and how well your annuity
investments have performed over time
 Fixed annuities (invests in bonds)
 Variable annuities (invests in mutual funds)
Advantages and Disadvantages of
Tax-Deferred Annuities

Can be funded with retirement account dollars
or after-tax dollars
 No limit on contributions

Interest earned is tax deferred
 You pay taxes on any pre-tax annuity
contributions and all tax-deferred earnings as you
withdraw them in retirement
 As with other retirement plans, when you retire
you will likely be in a lower income tax bracket

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Downside – Very high fees!
 Annuity company usually takes between 1½% to
3% every year! (That is on top of the mutual fund fees!)
Review: Account Types
 Regular Account
 Taxes paid each year
 Retirement: Pre-tax Contribution
 Traditional IRA, 401(k), 403(b), SEP IRA, etc.
 Tax-deferred (Taxes paid in retirement)
 Retirement: Post-tax Contribution
 Roth IRA, “Roth 401(k),” “Roth 403(b)”
 Tax-free in retirement
 Annuity
 High fees
 Earnings tax-deferred
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