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Once you've decided to plan for your future, the next step is to understand the retirement accounts that are available. There are a variety of options, including several tax-advantaged plans. You can defer paying taxes on the earnings these accounts may generate, for years or even decades. You may be in a lower tax bracket when you begin withdrawing money in retirement – which could mean significant potential tax savings for you! |
One of the most popular retirement plans, an IRA, provides tax-advantaged savings for retirement investors and can be an effective way to supplement other long-term savings vehicles. While your money is in an IRA, you don't pay any current income tax on the interest, dividends or capital gains earned. This can be a critical advantage in building up the value of your investment over time and your savings can compound more quickly than if they were in a taxable account. Through an IRA you can invest in a variety of options including investments such as mutual funds, individual stocks or traditional deposit products such as CDs.
There are two types of IRAs available for your annual contributions: Roth IRAs and Traditional IRAs. In a Roth IRA, your investment will grow federally tax-free and you'll never have to pay Federal income taxes on your earnings, provided certain requirements are met. In a Traditional IRA, your investment will grow taxdeferred, meaning you won't pay any taxes on earnings until you make a withdrawal. Also, for some investors, contributions to a Traditional IRA are taxdeductible.
The main advantage of the Traditional IRA is that earnings can grow tax-deferred.
Contributions to a Traditional IRA may be tax-deductible depending on your income and your participation in an employersponsored plan.
The main advantage of the Roth IRA is that earnings can grow tax-free. Contributions to a Roth IRA are not tax-deductible. Under certain conditions, distributions of earnings from a Roth IRA are not subject to Federal income tax.
Anyone under the age of 70½ with earned income.
Individuals of any age with earned income, as long as their modified adjusted gross income (MAGI)is below certain levels.
 
For the year 2008, you can save as much as $5,000 per year (or the amount of your earned income, if less), in total, in Traditional and Roth IRAs. Married couples may contribute as much as $10,000 ($5,000 for each spouse), even if one spouse does not work, as long as joint compensation is at least equal to the amount contributed. An additional $1,000 catch-up contribution is allowed to individuals who have reached age 50.
Same as a Traditional IRA. The ability to contribute to a Roth IRA is phased out for higher income individuals, and when modified adjusted gross income reaches $116,000 for a single taxpayer ($169,000 for joint filers), no Roth IRA contributions are allowed.
The Economic Growth and Tax Reconciliation Act of 2001 (Act) raised the annual contribution limit for Traditional and Roth IRAs beginning 1/01/02. Unless extended by Congress, the provisions of the Act expire on 12/31/10.
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Age 59 ½. Taxable withdrawals made prior to that may be subject to a 10% Federal tax penalty. You can, however, make withdrawals with no tax penalty prior to reaching age 59½ for the following reasons:
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To buy your first home (up to $10,000). |
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To pay for qualified higher-education expenses. |
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Death or disability of the account owner. |
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Part of a series of substantially equal periodic payments based on your life expectancy. |
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To pay health insurance premium payments for you and your family if you are unemployed and have received at least 12 weeks of Federal or State unemployment compensation. |
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Payments of unreimbursed medical expenses in excess of 7.5% of your adjusted gross income.
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Other qualified distributions may apply.
You can withdraw your contributions at any age with no tax penalty. But if you withdraw earnings from an account that is less than five years old, you may pay ordinary income tax plus an additional Federal tax penalty of 10%. This 10% penalty does not apply if the earnings are withdrawn in the following circumstances:
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After age 59½. |
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To buy your first home (up to $10,000). |
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To pay for qualified higher-education expenses. |
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Death or disability of the account owner. |
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Part of a series of substantially equal periodic payments based on your life expectancy. |
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To pay health insurance premium payments for you and your family if you are unemployed and have received at least 12 weeks of Federal or State unemployment compensation. |
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Payments of unreimbursed medical expenses in excess of 7.5% of your adjusted gross income. |
Other qualified distributions may apply.
Any earnings and deductible contributions are subject to federal income tax upon withdrawal.
Distributions of contributions are federally tax-free, qualified distributions of earnings are federally tax-free. What this means is that, unlike a Traditional IRA, the Roth IRA lets you withdraw your earnings federally tax-free if you are at least 59½ years old and your account has been established for five years or more.
Distributions must start by April 1 of the year following the year you reach 70½.
No requirement to begin distributions at any age. This gives you additional time to take advantage of potential tax-free earnings. As you do not have to withdraw your money at any age, you may pass your Roth IRA assets on to your beneficiaries if you wish.
An IRA Transfer is not the same as an IRA Rollover and it is important to be able to distinguish between the two.
can be done as often as desired without limitation and it is the usual procedure when moving an IRA from one sponsor, such as a mutual fund company, to another. Sometimes investors will do this if they are dissatisfied with their current money manager. They will initiate movement of their IRA assets from one trustee or custodian to another, and the IRA assets are transferred directly from that trustee or custodian to another, without being distributed to the account holder.
An IRA rollover is a tax-free distribution to you from one IRA that you contribute within 60 days to another IRA. If you make a rollover of any part of a distribution from a Traditional IRA, you cannot, withina 12-month period, make a tax-free rollover of another distribution from an IRA. Most of the rules for rollovers from Traditional IRAs also apply to Roth IRAs.
Qualified Plan Rollovers are typically done when an investor changes jobs or retires. There are two ways this rollover can be handled:
Your money in a qualified plan is moved directly to an IRA. If you roll over your funds directly from the plan to an IRA, you can continue to defer tax on the earnings and your money continues to grow unhampered by taxes. In order for a distribution to be considered “directly rolled over,” the qualified plan must either:
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wire the distribution to the new IRA trustee or custodian |
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mail the distribution directly to the new IRA trustee or custodian |
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Social Security faces an uncertain future and may be inadequate for your needs. |
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give you the distribution in the form of check payable to the new IRA trustee or custodian as trustee or custodian of your IRA, which you give to the new IRA trustee or custodian within 60 days |
You receive your retirement plan assets and must reinvest them in an IRA within 60 days. Your plan's trustee will withhold 20% in taxes from the amount paid to you, even if you intend to roll the distribution over to an IRA, so you will receive 80% of your account value. To accomplish a rollover of 100% of your account, you must make up the shortfall from other funds. Any taxable amount of distribution that is not rolled over is taxable to you in the year of distribution and a 10% early distribution penalty tax may apply if you are under 59½ years old.
However you handle your IRA Rollover, you may want to keep it separate and not combine it with any regular IRA investments you may have. This is done because the law permits qualified plan assets to be rolled over again at some later date into a new employer's pension or profit sharing plan, but you are not allowed to do this if you commingle these assets with other assets.
Generally, you may withdraw assets from one IRA and roll them over, within 60 days, to another IRA tax-free.Rollovers from one Roth IRA to another Roth IRA.
Generally, you may withdraw assets from one Roth IRA and roll them over within 60 days to another Roth IRA tax-free.
Many employers offer their employees a 401(k) retirement plan. The employee typically makes pre-tax contributions to their 401(k) account each pay period. The funds are automatically deducted from the employee's paycheck and deposited into their 401(k) account, where they can be invested in a variety of investment vehicles, including mutual funds. Importantly, the money invested isn't included in your federal taxable income when you complete your annual tax return. For example, if you earn $35,000 but put $5,000 into a 401(k), your taxable income for the year would be only $30,000. Another benefit of 401(k)s is that many companies that offer them also match employee contributions. For example, the company might add 50 cents to the employee's account for every dollar contributed by the employee, up to a certain amount. This match can really add momentum to your retirement account and result in significant assets over time. Finally, 401(k)s can be a tax smart way to save for retirement. Contributions and earnings that accumulate in the account are not taxed until you start making withdrawals, usually after you reach age 59½. Note that if you withdraw earlier, you may also have to pay a 10% penalty tax.
A specialized plan for employees of educational, charitable, or religious organizations.
A 403(b) retirement plan also allows you to defer taxes on a portion of your salary for retirement purposes.
This plan allows your employer to contribute annually towards your retirement an amount equal to a specified percentage of your salary.
The SIMPLE-IRA is a tax-deferred retirement plan that owners of small businesses (those with fewer than 100 employees) can set up, provided that their business does not already have a retirement plan. The employer and employees both contribute to the plan. Taxes are deferred on contributions to a SIMPLE-IRA, and any earnings the account generates, until the employee begins to withdraw money in retirement, at which time the distributions are taxed as ordinary income.
An employee retirement plan that allows the employer to make discretionary annual contributions.
A type of plan funded by the employer that pays employees defined retirement benefits as specified in the plan.
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Now that you have a good understanding of the types of retirement accounts available, you need to determine a long-term investment strategy that works for you. Many people recognize the importance of investing, not just saving, for their retirement. Traditional bank accounts may be more secure than investments such as mutual funds, but they offer significantly less growth potential.* In fact, the interest you earn on a bank account probably won't be enough to help you meet the financial demands of retirement.
In other words, you may be inadvertently taking on one kind of risk by trying to avoid another. To reap greater potential rewards, you almost always have to take on a greater amount of risk.
The key is to strike a balance between the returns you hope to gain from your
investments and the amount of risk you're willing to take on. Some of the factors you should consider are your age, the number of years you have until you plan to retire, your current financial situation and obligations. Generally speaking, if you're in your 20's, 30's or early 40's, you may be able to afford to invest more of your retirement savings in investments with a relatively high risk/return potential, such as stock mutual funds. As you get closer to retirement, you may want to take a more conservative approach and shift more of your assets into less volatile investments, such as high-quality bonds.
Every investor should also take advantage of techniques that may help reduce investment risk. Make sure, for example, that your portfolio is diversified across a variety of individual investments.* Mutual funds, by definition, are one of the most convenient ways to diversify. They offer other advantages, as well: your money will be managed by professionals who devote their time to tracking the market and analyzing investments. And, when you put your money in a mutual fund, it's pooled with money from other investors, creating much greater buying power than you would have on your own.
Now is the time to talk to your financial adviser about your retirement goals and how the MTB Funds can play a part in your retirement strategy. Your financial adviser can help you take that first step towards a financially secure retirement. Getting started now is the most important thing you can do.
The MTB Group of Funds offers a variety of mutual fund solutions. Choices ranging from largecap growth to managed allocation funds, to municipal bond funds and money market funds, allow you to diversify your investments within one mutual fund family.
Take a look at the chart on page 15. This chart provides you with an overview of the basic mutual fund types and how the MTB Group of Funds fits into these categories. It also shows you the potential risk/return trade-off of the various types of mutual funds available and explains why an investor might want to invest in each type.
You should also know that MTB offers three Managed Allocation Funds – Conservative Growth, Moderate Growth and Aggressive Growth – which allow you to put money market, bond or stock funds to work for you in a specific asset allocation combination that can be suitable for your particular situation and goals. See your financial adviser for details.**
**Diversification does not assure a profit nor protect against loss.
**Due to their strategy of investing in other mutual funds, these funds may incur certain additional expenses and tax results that would not be present with a direct investment in the underlying funds.
Mutual funds are subject to risks and fluctuate in value.
Now is the time to talk to your financial adviser about your retirement goals and how the MTB Funds can play a part in your retirement strategy. Your financial adviser can help you take that first step towards a financially secure retirement. Getting started now is the most important thing you can do.
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