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Content Highlights
A
Financial Warm-up
Your Savings
Fitness Dream
How's Your
Financial Fitness?
Avoiding
Financial Setbacks
Boost
Your Financial Performance
Strengthening
Your Fitness Plan
Personal Financial
Fitness
Maximizing
Your Workout Potential
Employer Fitness
Program
Financial
Fitness for the Self-Employed
Staying On Track
A Lifetime of Financial Growth
A Workout Worth Doing
Resources
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Savings
Fitness:
A Guide To Your Money and Your Financial Future
 Staying
On Track
Open
an IRA. You can put up to $3,000 a year into an individual
retirement account on a tax-deductible basis if your spouse isn't covered
by a retirement plan at work, or as long as your combined incomes aren't
too high. This amount remains the same through 2004 and will increase
in 2005 to $4,000. Persons who are 50 or older can contribute an additional
$500 for years 2002 through 2005. You also can put the same amount tax-deferred
into an IRA for a nonworking spouse if you file your income tax return
jointly. (By the way, you don't have to put in the full amount; you can
put in less.) With a traditional IRA, you delay income taxes on what you
put in and on the earnings until you withdraw the money. With a Roth IRA,
the money you put in is already taxed, but you won't ever pay income taxes
on the earnings as long as the account is open at least 5 years.
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CAUTION
- Don't borrow from your retirement
plan or permanently withdraw funds before retirement unless absolutely
necessary.
- Your retirement plan may allow
you to borrow from your account, often at very attractive rates.
However, borrowing reduces the accounts earnings, leaving you
with a smaller nest egg. Also, if you fail to pay back the loan,
you could end up paying income taxes and penalties. As an alternative,
consider budgeting to save the needed money or pursue other affordable
loan options.
- Also avoid permanently withdrawing
funds before retirement. This often happens when people change
jobs. According to a study by the Employee Benefits Research Institute
and Hewitt Associates, only 40 percent of workers changing jobs
rolled over into an IRA or a new employer's retirement plan the
money they received from their former employer's retirement plan.
They spent 6 out of every 10 dollars, rather than letting it grow
in another plan or IRA.
- Pre-retirement withdrawals
reduce the ultimate size of your nest egg. In addition, you'll
probably pay federal income taxes on the amount you withdraw (10
percent to as high as 39.1 percent) and a 10 percent penalty may
be tacked on if you're younger than age 59-1/2. In addition, you
may have to pay state taxes. If you're in a SIMPLE IRA plan, that
early withdrawal penalty climbs to 25 percent if you take out
money during the first 2 years you're in the plan.
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Consider
an annuity. An annuity is when you pay money to an
insurance company in return for its agreement to pay either a regular
fixed amount when you retire or an amount based on how much your investment
earns. There is no limit on how much you can invest in a private annuity,
and earnings aren't taxed until you withdraw them. However, annuities
present complex issues regarding taxes, fees, and withdrawal strategies
that may not make them the best investment choice for you. Consider discussing
this type of investment first with a financial planner.
Build
your personal savings. You can always save money
on your own, either in mutual funds, stocks, bonds (such as U.S. Savings
Bonds), real estate, CDs, or other assets. It's best to mark these investments
as part of your retirement fund and don't use them for anything else unless
absolutely necessary.
Investing in an IRA, an annuity,
or in personal savings means you are totally responsible for directing
your own investments. How conservatively or aggressively you invest is
up to you. It will depend in part on how willing you are to take investment
risks, your age, the stability of your job, and other financial needs.
Learn as much as you can about investing and about specific investments
you are considering. You also may want to seek the help of a professional
financial planner. Go to www.CFPnet/learn
for tips on choosing a financial planner who puts your interests first.
What To Do If You Are
Self-Employed
Many people today work for
themselves, either fulltime or in addition to their regular job. They
have several tax-deferred options from which to choose.
SEP.
This is the same type of SEP described earlier under employer-based retirement
plans. Only here, you're the employer and you fund the SEP from your earnings.
You can easily set up a SEP through a bank, mutual fund, or other financial
institution.
Keogh.
Keoghs are more complicated to set up and maintain, but they offer more
advantages than a SEP For one thing, they come in several varieties. Some
of the varieties allow you to sock away more money sometimes a lot more
money-than a SEP
SIMPLE
IRA. Described earlier under employer-based
retirement plans, a SIMPLE IRA can be used by the self-employed. However,
generally you can't save as much as you can with a SEP or Keogh.
IRA.
Usually you are better off funding a SEP or a Keogh unless your self-employment
income is small.
Annuities.
See annuities under the section on "What
to Do if You Can't Join an Employer-Based Plan".
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