Retirement is one of life’s biggest worries and retirement plans play a crucial role in providing a source of income in a person’s retired years. Retirement can span up to a third of a lifetime. Retirement plans are much like saving for a 25-year vacation. To afford an expense of that magnitude a person needs to start planning early. Age has a critical impact on one’s ability to save.
The Social Security system, company retirement policies and personal lifetime savings are the three sources from where funds are drawn to pay for expenses after retirement. There are several plans that benefit employers and employees alike. A qualified retirement plan is a plan that meets the requirements of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA). The plan attracts many tax benefits.
A plan that does not meet the requirements of the IRC or ERISA is known as a non-qualified retirement plan. These plans are typically used to provide deferred compensation to key employees. The plan allows wider flexibility to an employer and therefore, they do not receive tax deductions until the employee receives proceeds from the plan.
A defined benefit plan is a traditional company pension plan. The retirement benefit is determinable as a dollar amount or as a percentage of wages. These plans are funded entirely by the employer and the responsibility for payment of the accompanying benefits rests with the employer.
A defined contribution plan is a retirement plan in which the contribution is defined, but the ultimate amount of benefit to be paid is not. The actual benefit at the time of retirement depends on the amount contributed over the years and on the investment performance of the account through the years. In this retirement plan, the investment risk may rest solely with the employee. These plans are known by various names such as money purchase, profit sharing, 401(k), or 403(b) plans.
An Individual Retirement Arrangement (IRA) is a personal retirement savings plan available to any individual, regardless of age, who receives taxable compensation during the year. Wages, salaries, fees, tips, bonuses, commissions and taxable alimony are all included.
Retirement plans are a long-term goal that requires steady, long-term saving. To ensure a comfortable retired life, studying and participating in at least some of the various retirement investment plans is critical.
Retirement Plans provides detailed information on Retirement Plans, 401K Retirement Plans, Small Business Retirement Plans, Retirement Plan Services and more. Retirement Plans is affiliated with Individual Retirement Account Withdrawals.
Saturday, June 13, 2009
Planning Early Retirement (by Boris Mann)
As a college student, have you ever thought about investing for your retirement? Although it may seem too early to even think about retirement, especially since you probably haven't even started your career yet, it just might be a good idea. In the aftermath of hurricane Katrina, serious questions have been raised about social security system in our country. It seriously dented credibility of the world's only super power to deal with its own people seeking help. It showed how elder people are more vulnerable to such disasters than the young ones as they lost their entire livelihood and are back to square in the twilight of their lives. They cannot rejoin the work force to earn what they lost. The whole situation emphasized the importance of personal savings.
Why to save and why to start it early
The most potent question is why to save in today's plastic society. We can credit on finger tips, jobs market is decent and social security is still functioning. The answer is the society won't remain the same, the economy won't remain the same and certainly our priorities won't remain the same. Let's try to peek into future and analyze what are factors which will play their part in our decision making.
Demographic factors
As the American society is getting older the pressure on the social security will keep on increasing in the times to come. As the baby boomers are growing old the pressure when our generation will join the work force. will be immense. There will be considerable more percentage of people on social security vis a vis working population in times to come.
As with the advancements in the medicines the life expectancy of an average American is steadily growing. It will lead to pressure on social security system plus personal retirement saving has to last more than at present. Secondly the health bill will also increase which further will take away a chunk from savings.
Economical factors
Employment scenario
As Carly Fiorina former CEO of Hewlett Packard rightly put it 'Today no job can be taken as an American birth right'. Outsourcing has put tremendous pressure on the job market. Companies are transporting jobs to inexpensive places abroad to maintain the bottom line. We have already seen what has happened to textile workers in seventies and eighties, back up office services at the turn of the century. Information technology is defining new ways of doing things and it has already made significant forage into death of distance and time. An American credit card holder today sorts out all the account related queries from an Indian sitting in far off places like Bangalore at one forth the amount an average American worker charges.
Today the glorious days of fat corporate pensions and generous employers contribution has started to become the thing of past. Companies like Wal-Mart are not even allowing workers to form union. The only buzzwords in corporate sectors are restructuring, outsourcing and retrenchment. Technology is replacing people at work and making business a lean and mean machine, better than ever before.
Sluggish stock market
Historically stock market use to give around 6-9 % return on the investments but as the economy has been stabilized the return has been lower. The future doesn't look as promising as it was in the beginning of the turn of the century when dot com boom was at its peak. The crude is about to touch mid seventies high with most anti American countries controlling it. As the largest energy consumer in the world our expenses will spiral towards north than south.
Social Factors
Apart from demographical and economical factors there are lifestyle factors which are influencing the savings pattern. Today saving for retirements seems to be the last option on our minds but it needs our urgent consideration. Talking to various people suffering from lack of money in their retirement years I try to fix the puzzle -
• Most people start late - Holistically most people in twenties have priorities like owning their own house, or finding a new job. In their thirties they worry about their kids' school and college expenses. And in late forties when they realize the importance of saving for post retirement years it is already too late and they end up building an insufficient buffer for years to come.
• Changing lifestyle - Today increasing divorce rate and growing tendencies of couples 'living in' will leave more people living alone in twilight of their life then ever before. With less company, people have to save more so that they can be well taken care of.
Sluggish economy, stagnant stock market, not so promising job scenario and social & personal factors will take a lot out of one's savings in the latter years. To avoid such situations our generation has to start saving earlier for our post retirement years than the previous ones.
Savings doesn't have to be "all or nothing!" one doesn't have to choose between present financial obligations and saving for retirement years. Saving small amounts while paying for obligations can put compounding and tax-deferred growth to work for you. Just to put things in perspective - If someone begins saving $500 monthly at 40 and earns an annualized 8 percent return. At 65, they would have about $457,000. If that same person started saving instead at age 30, they would have that $457,000 10 years earlier, and even if they didn't add another penny over the next 10 years, their retirement fund would grow to just under $1 million. Obviously it is a simplified example, but it states that the sooner you get started the more you save, the more the power of compounding return can help your balance grow.
Making a retirement plan
Making a retirement plan in twenties is lot different from charting one when you are in your mid forties. According to the Fidelitye401k.com site, experts estimate that "every one of us will need between 60 to 80 % of our final annual working income every year that we're retired. Since Social Security usually provides only 40 percent of the average retiree's income, many of us will need to rely on our own savings and investments".
In a recent survey ABC/USA Today poll, few workers are saving barely adequade to afford a comfortable retirement. 69% of workers surveyed on the issue of retirement responded "running out of money" as their biggest worry. Less than half of all workers have correctly estimated how much they will need to support a long, comfortable retirement. For a couple to live comfortably on, say, $50,000 a year for 20 years will require $1 million in savings. And that doesn't include the expense of assisted living, medical care, prescription drugs, or nursing home costs. To start early we can keep following aspects in mind while charting a retirement plan.
Define your goal - Goal definition is in nascent form right now, between twenty and thirty years one should look to find a continuous job and contribute small and consistent amount of money.
Make personal retirement goals - Have a good idea about how much you like to have in your nest when you retire and plan accordingly. As you will reach the peak of your career in forties so make timely provision year wise that will help you from lack of liquidity in twenties and thirties and making an enormous contribution later in your career. Try to achieve a balance.
Account for large one-time expenses - At this stage you must have taken education loan or paying home installments so make sure you make provision for them.
Make conservative estimates of return on investments - Most people falters on a good retirement nest just because overestimate the return on their investments or try saving late. So to avoid this pitfall making the future income estimation and inflation rate should be taken on conservative side.
Where one can invest
Mostly there are two ways of having retirement savings
1. Defined benefit plan
A Defined Benefit Plan promises the employee a specific monthly benefit at retirement and can be fixed in exact dollar amount. A participant in the plan is generally not required to make contributions in a private sector fund but generally public sector funds require employee contributions. Though most companies today are not providing it, Defined Benefit Plans guarantee retirement income security for workers, do not involve investment risk to participants, do not depend upon workers ability to save and defer taxes.
2. Defined Contribution Plan
A Defined Contribution Plan provides an individual account for each participant in the plan. The benefits depend upon the amount contributed by participant and affect his income, and performances of his investments. Some most popular defined contribution plans include 401(K) plans, 403(b) plans, employee stock ownership plans (ESOPS) and profit sharing plans. Under Defined Contribution Plan workers have a certain degree of how much they can save, it can be funded through payroll deductions, even lump sum distributions is eligible for special 10 year averaging and above all workers can benefit from good investment results.
As companies are struggling to secure bottom line and outsourcing various functions to cut cost, most companies mostly offer contribution plans these days. These plans are also favored by workers as they can define their savings limit and have an option of taking the money out, when needed. The most popular contribution plan is 401(K) and Individual Retirement Account (IRA).
What is a 401k plan?
A 401(k) is an employer-sponsored contribution plan. it allows the employee to divert some of his salary into a fund which is supported and contributed in some part by the employer.. the portion contributed by employee will not be considered part of his taxable income. In other words, that employee has lower taxable income than. The portion of salary saved and contributed into the 401(k) gets invested in different ways, usually into mutual funds, bonds and equity. Those investments grow on a tax-deferred basis, which means that the compounded growth of the investments is also not added to taxable income. It will only become taxable when it is withdrawn. Most employers contribute to their employees' 401(k) accounts as an added benefit, by matching employees' contributions in different ratios, and the most common arrangement is that the employer contributes 50 cents for each dollar an employee contributes, usually up to 6 percent of the employee's salary.
Advantages of 401 (K)
Matching contributions is free money so one must at least contribute enough to make the employer pay his contribution.
You can roll it into your IRA once you decided to leave the job or can cash it even though it is not a preferred option. Using a Rollover IRA to maximize your eligible distribution from your employer's plan provides significant benefits and protects your savings from current taxes and penalties.
You can withdraw your money just paying one time tax after reaching 59 and half years, or you can withdraw money after 5 years by paying 10 percent penalty. This can help if you are planning to start your own venture in early thirties.
Individual Retirement Account (IRA)
There are two IRA plans: Traditional IRA and Roth IRA.
Traditional IRA
Anyone who works or receives alimony can have to an individual retirement account ( IRA) . The employer has no role to play with this account. It is opened and maintained by the individual and usually opened with a investment company. For most people, the maximum contribution each year is $2,000. The cap may be lower if you have a retirement plan at work or your income reaches certain limits. One thing an IRA has in common with a 401(k) and IRA is the age to withdraw funds without penalty, in both the cases it is 59-1/2.
Roth IRA
The difference between the Roth and the traditional IRA is that Roth is not deductible, the funds must be held for at least five years and If withdrawn are made prior to that, there is a 10 percent penalty. If you hold the funds in a Roth for at least five years and make your withdrawals after you reach age 59-1/2, your withdrawals will not be taxable. Neither your contributions nor the interest, dividends on investments, capital gains are taxable.
Advantages of IRA
Spousal Accounts - There is an important exception to the rule that you must have compensation to have an IRA. If you have a job but your spouse does not, you can contribute up to $3,000 of your income to a spousal IRA for him or her.
There is no minimum age limit - There is no minimum age for IRA participation. If your 10-year-old has compensation from working in a family business through paper route, you can pay up to the limits in an IRA.
Conclusion
Times are changing for Americans today, Americans companies are facing unprecedented competition and to cut cost companies are either to restructure or pay less like Walmart. As the economy will get more sophisticated protecting our future will be an ongoing task rather than a last ditch effort. Investing in plans like 401 (K) makes sense as they not only inculcate a saving habit among us but also gives us freedom to chart the route of our future. Saving habits today can serve both us and the country in long run as historically saving rates usually defines the growth rate of countries.
Boris Mann writes business and financial management articles, journal and columns for Knowledge Weekly.
Why to save and why to start it early
The most potent question is why to save in today's plastic society. We can credit on finger tips, jobs market is decent and social security is still functioning. The answer is the society won't remain the same, the economy won't remain the same and certainly our priorities won't remain the same. Let's try to peek into future and analyze what are factors which will play their part in our decision making.
Demographic factors
As the American society is getting older the pressure on the social security will keep on increasing in the times to come. As the baby boomers are growing old the pressure when our generation will join the work force. will be immense. There will be considerable more percentage of people on social security vis a vis working population in times to come.
As with the advancements in the medicines the life expectancy of an average American is steadily growing. It will lead to pressure on social security system plus personal retirement saving has to last more than at present. Secondly the health bill will also increase which further will take away a chunk from savings.
Economical factors
Employment scenario
As Carly Fiorina former CEO of Hewlett Packard rightly put it 'Today no job can be taken as an American birth right'. Outsourcing has put tremendous pressure on the job market. Companies are transporting jobs to inexpensive places abroad to maintain the bottom line. We have already seen what has happened to textile workers in seventies and eighties, back up office services at the turn of the century. Information technology is defining new ways of doing things and it has already made significant forage into death of distance and time. An American credit card holder today sorts out all the account related queries from an Indian sitting in far off places like Bangalore at one forth the amount an average American worker charges.
Today the glorious days of fat corporate pensions and generous employers contribution has started to become the thing of past. Companies like Wal-Mart are not even allowing workers to form union. The only buzzwords in corporate sectors are restructuring, outsourcing and retrenchment. Technology is replacing people at work and making business a lean and mean machine, better than ever before.
Sluggish stock market
Historically stock market use to give around 6-9 % return on the investments but as the economy has been stabilized the return has been lower. The future doesn't look as promising as it was in the beginning of the turn of the century when dot com boom was at its peak. The crude is about to touch mid seventies high with most anti American countries controlling it. As the largest energy consumer in the world our expenses will spiral towards north than south.
Social Factors
Apart from demographical and economical factors there are lifestyle factors which are influencing the savings pattern. Today saving for retirements seems to be the last option on our minds but it needs our urgent consideration. Talking to various people suffering from lack of money in their retirement years I try to fix the puzzle -
• Most people start late - Holistically most people in twenties have priorities like owning their own house, or finding a new job. In their thirties they worry about their kids' school and college expenses. And in late forties when they realize the importance of saving for post retirement years it is already too late and they end up building an insufficient buffer for years to come.
• Changing lifestyle - Today increasing divorce rate and growing tendencies of couples 'living in' will leave more people living alone in twilight of their life then ever before. With less company, people have to save more so that they can be well taken care of.
Sluggish economy, stagnant stock market, not so promising job scenario and social & personal factors will take a lot out of one's savings in the latter years. To avoid such situations our generation has to start saving earlier for our post retirement years than the previous ones.
Savings doesn't have to be "all or nothing!" one doesn't have to choose between present financial obligations and saving for retirement years. Saving small amounts while paying for obligations can put compounding and tax-deferred growth to work for you. Just to put things in perspective - If someone begins saving $500 monthly at 40 and earns an annualized 8 percent return. At 65, they would have about $457,000. If that same person started saving instead at age 30, they would have that $457,000 10 years earlier, and even if they didn't add another penny over the next 10 years, their retirement fund would grow to just under $1 million. Obviously it is a simplified example, but it states that the sooner you get started the more you save, the more the power of compounding return can help your balance grow.
Making a retirement plan
Making a retirement plan in twenties is lot different from charting one when you are in your mid forties. According to the Fidelitye401k.com site, experts estimate that "every one of us will need between 60 to 80 % of our final annual working income every year that we're retired. Since Social Security usually provides only 40 percent of the average retiree's income, many of us will need to rely on our own savings and investments".
In a recent survey ABC/USA Today poll, few workers are saving barely adequade to afford a comfortable retirement. 69% of workers surveyed on the issue of retirement responded "running out of money" as their biggest worry. Less than half of all workers have correctly estimated how much they will need to support a long, comfortable retirement. For a couple to live comfortably on, say, $50,000 a year for 20 years will require $1 million in savings. And that doesn't include the expense of assisted living, medical care, prescription drugs, or nursing home costs. To start early we can keep following aspects in mind while charting a retirement plan.
Define your goal - Goal definition is in nascent form right now, between twenty and thirty years one should look to find a continuous job and contribute small and consistent amount of money.
Make personal retirement goals - Have a good idea about how much you like to have in your nest when you retire and plan accordingly. As you will reach the peak of your career in forties so make timely provision year wise that will help you from lack of liquidity in twenties and thirties and making an enormous contribution later in your career. Try to achieve a balance.
Account for large one-time expenses - At this stage you must have taken education loan or paying home installments so make sure you make provision for them.
Make conservative estimates of return on investments - Most people falters on a good retirement nest just because overestimate the return on their investments or try saving late. So to avoid this pitfall making the future income estimation and inflation rate should be taken on conservative side.
Where one can invest
Mostly there are two ways of having retirement savings
1. Defined benefit plan
A Defined Benefit Plan promises the employee a specific monthly benefit at retirement and can be fixed in exact dollar amount. A participant in the plan is generally not required to make contributions in a private sector fund but generally public sector funds require employee contributions. Though most companies today are not providing it, Defined Benefit Plans guarantee retirement income security for workers, do not involve investment risk to participants, do not depend upon workers ability to save and defer taxes.
2. Defined Contribution Plan
A Defined Contribution Plan provides an individual account for each participant in the plan. The benefits depend upon the amount contributed by participant and affect his income, and performances of his investments. Some most popular defined contribution plans include 401(K) plans, 403(b) plans, employee stock ownership plans (ESOPS) and profit sharing plans. Under Defined Contribution Plan workers have a certain degree of how much they can save, it can be funded through payroll deductions, even lump sum distributions is eligible for special 10 year averaging and above all workers can benefit from good investment results.
As companies are struggling to secure bottom line and outsourcing various functions to cut cost, most companies mostly offer contribution plans these days. These plans are also favored by workers as they can define their savings limit and have an option of taking the money out, when needed. The most popular contribution plan is 401(K) and Individual Retirement Account (IRA).
What is a 401k plan?
A 401(k) is an employer-sponsored contribution plan. it allows the employee to divert some of his salary into a fund which is supported and contributed in some part by the employer.. the portion contributed by employee will not be considered part of his taxable income. In other words, that employee has lower taxable income than. The portion of salary saved and contributed into the 401(k) gets invested in different ways, usually into mutual funds, bonds and equity. Those investments grow on a tax-deferred basis, which means that the compounded growth of the investments is also not added to taxable income. It will only become taxable when it is withdrawn. Most employers contribute to their employees' 401(k) accounts as an added benefit, by matching employees' contributions in different ratios, and the most common arrangement is that the employer contributes 50 cents for each dollar an employee contributes, usually up to 6 percent of the employee's salary.
Advantages of 401 (K)
Matching contributions is free money so one must at least contribute enough to make the employer pay his contribution.
You can roll it into your IRA once you decided to leave the job or can cash it even though it is not a preferred option. Using a Rollover IRA to maximize your eligible distribution from your employer's plan provides significant benefits and protects your savings from current taxes and penalties.
You can withdraw your money just paying one time tax after reaching 59 and half years, or you can withdraw money after 5 years by paying 10 percent penalty. This can help if you are planning to start your own venture in early thirties.
Individual Retirement Account (IRA)
There are two IRA plans: Traditional IRA and Roth IRA.
Traditional IRA
Anyone who works or receives alimony can have to an individual retirement account ( IRA) . The employer has no role to play with this account. It is opened and maintained by the individual and usually opened with a investment company. For most people, the maximum contribution each year is $2,000. The cap may be lower if you have a retirement plan at work or your income reaches certain limits. One thing an IRA has in common with a 401(k) and IRA is the age to withdraw funds without penalty, in both the cases it is 59-1/2.
Roth IRA
The difference between the Roth and the traditional IRA is that Roth is not deductible, the funds must be held for at least five years and If withdrawn are made prior to that, there is a 10 percent penalty. If you hold the funds in a Roth for at least five years and make your withdrawals after you reach age 59-1/2, your withdrawals will not be taxable. Neither your contributions nor the interest, dividends on investments, capital gains are taxable.
Advantages of IRA
Spousal Accounts - There is an important exception to the rule that you must have compensation to have an IRA. If you have a job but your spouse does not, you can contribute up to $3,000 of your income to a spousal IRA for him or her.
There is no minimum age limit - There is no minimum age for IRA participation. If your 10-year-old has compensation from working in a family business through paper route, you can pay up to the limits in an IRA.
Conclusion
Times are changing for Americans today, Americans companies are facing unprecedented competition and to cut cost companies are either to restructure or pay less like Walmart. As the economy will get more sophisticated protecting our future will be an ongoing task rather than a last ditch effort. Investing in plans like 401 (K) makes sense as they not only inculcate a saving habit among us but also gives us freedom to chart the route of our future. Saving habits today can serve both us and the country in long run as historically saving rates usually defines the growth rate of countries.
Boris Mann writes business and financial management articles, journal and columns for Knowledge Weekly.
Secure Your Retirement with a Rollover IRA (by Sam Subramanian)
Switching your job? Retiring? Congratulations! A window of opportunity opens for you with the Rollover Individual Retirement Account or Rollover IRA.
In an era of corporate restructuring and outsourcing, Rollover IRA is among the most powerful means available for securing one’s retirement. Yet, its potential to enlarge one’s assets for the sunset years commonly remains under-appreciated.
The Rollover IRA dramatically increases the range of choices available to you for investing your retirement savings. By offering investment choices hitherto unavailable in employer-sponsored plans such as 401k, 403b, or Section 457 plans, Rollover IRA provides you the means to have direct control of and more aggressively grow your nest egg.
This article discusses the advantages of Rollover IRA over employer-sponsored retirement plans.
So, if you are leaving your job and have accumulated assets in the employer-sponsored retirement plan, continue reading this article to learn about your options and more.
Four Options
You have four options on what you can do with your savings in your employer-sponsored plan when you are switching jobs or retiring.
1) Cash your savings.
2) Continue with the retirement plan of your previous employer.
3) Switch to the retirement plan sponsored by your new employer.
4) Set up a Rollover IRA account with a mutual fund company and move your retirement savings into that account.
Unless you have a pressing need, it is best not to cash your retirement savings. First, cash withdrawals from the retirement plan will be subject to federal and state taxes. Second, your retirement savings diminish and you will have fewer assets to grow tax-deferred.
While the three other options will not erode your retirement savings and will allow it to grow tax-deferred, they are not equal in their ability to help you boost its growth rate.
Increased Investment Choices
Most employees earn meager returns on their employer-sponsored retirement plan savings. A Dalbar study reports that the average 401k plan investor achieved an annual return of just 3.5% during a 20-year period when the S&P 500 returned 13.0% per year.
Part of the problem stems from the fact that most retirement plans offer only a limited number of investment choices. A Columbia University study finds the median number of mutual fund choices in 401k plans to be just 13. The actual number of equity mutual fund investment choices however is less, since the median number includes money market funds, fixed income funds, and balanced funds.
With fewer investment choices, employer-sponsored plans limit your ability to take advantage of different market trends and to continually position your retirement savings in mutual funds with superior risk-reward profiles.
If you set up a Rollover IRA with a large mutual fund company such as Fidelity Investments, T. Rowe Price or Vanguard Group, you will break the shackles imposed by your employer-sponsored plan and dramatically increase the number of mutual funds available for investing your retirement savings. Fidelity, for example, provides access to several thousand mutual funds besides the more than 180 mutual funds it manages.
Setting up the Rollover IRA
Let’s say you decide to move your retirement savings to a Rollover account with a mutual fund company. How do you make it happen?
Contact the mutual fund company in which you wish to open an account and ask them to send you their Rollover IRA kit. Complete the form for opening the Rollover IRA account and mail it to the mutual fund company. Next, complete any forms required by the retirement plan administrator of your previous employer and request transfer of your assets into the Rollover IRA account.
You have two choices for moving your retirement savings to your Rollover IRA account. One is to elect to have the money transferred directly from the employer-sponsored plan to the Rollover IRA account. This is called direct rollover. With the indirect rollover alternative, you take the distribution from the retirement plan and then deposit it in the Rollover IRA account. Unless exceptions apply, you have 60 days to deposit the distribution and qualify for tax-free rollover.
Boosting Your Rollover IRA Performance
You need a well thought-out strategy to benefit from the wide range of investment choices available in the Rollover IRA. You can develop the strategy yourself or derive ideas from investment newsletters.
The investment strategy will enable you to maximize return and minimize risk by leveraging the potential of different investment vehicles within each asset class. For example, you can include sector funds among equity investments and international bond funds among fixed-income investments.
Adding to Your Rollover IRA
You can leverage the potential of your Rollover IRA further by adding to it each time you change jobs. With the Rollover IRA already set up, all you have to do is to instruct the retirement plan administrator of your last employer to transfer assets to the Rollover IRA. There is no limit on the amount of money you can transfer.
You may also add money to your Rollover IRA through regular annual contributions. They are however subject to the annual limit for IRA contributions.
Summary
When you are switching jobs or retiring, the Rollover IRA opens a window of opportunity for you, widening the range of investment choices for your retirement assets hitherto not available in the employer-sponsored plan. The self-directed Rollover IRA empowers you to construct and manage a mutual fund portfolio to boost the growth rate of your retirement savings.
Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein.
Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds included in the AlphaProfit Core and Focus model portfolios. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments or other mutual fund companies mentioned in this report. Past performance is neither an indication of nor a guarantee for future results. This document may be reproduced only in its entirety including the author’s bio and hyperlinks to AlphaProfit’s web site.
Copyright © 2006 AlphaProfit Investments, LLC. All rights reserved.
Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. He edits the AlphaProfit Sector Investors' Newsletter™. The investment newsletter, ranked #1 by Hulbert Financial Digest, offers model portfolios that are popular with Fidelity 401k and Rollover IRA investors. To learn more about the investment newsletter, visit http://www.alphaprofit.com
In an era of corporate restructuring and outsourcing, Rollover IRA is among the most powerful means available for securing one’s retirement. Yet, its potential to enlarge one’s assets for the sunset years commonly remains under-appreciated.
The Rollover IRA dramatically increases the range of choices available to you for investing your retirement savings. By offering investment choices hitherto unavailable in employer-sponsored plans such as 401k, 403b, or Section 457 plans, Rollover IRA provides you the means to have direct control of and more aggressively grow your nest egg.
This article discusses the advantages of Rollover IRA over employer-sponsored retirement plans.
So, if you are leaving your job and have accumulated assets in the employer-sponsored retirement plan, continue reading this article to learn about your options and more.
Four Options
You have four options on what you can do with your savings in your employer-sponsored plan when you are switching jobs or retiring.
1) Cash your savings.
2) Continue with the retirement plan of your previous employer.
3) Switch to the retirement plan sponsored by your new employer.
4) Set up a Rollover IRA account with a mutual fund company and move your retirement savings into that account.
Unless you have a pressing need, it is best not to cash your retirement savings. First, cash withdrawals from the retirement plan will be subject to federal and state taxes. Second, your retirement savings diminish and you will have fewer assets to grow tax-deferred.
While the three other options will not erode your retirement savings and will allow it to grow tax-deferred, they are not equal in their ability to help you boost its growth rate.
Increased Investment Choices
Most employees earn meager returns on their employer-sponsored retirement plan savings. A Dalbar study reports that the average 401k plan investor achieved an annual return of just 3.5% during a 20-year period when the S&P 500 returned 13.0% per year.
Part of the problem stems from the fact that most retirement plans offer only a limited number of investment choices. A Columbia University study finds the median number of mutual fund choices in 401k plans to be just 13. The actual number of equity mutual fund investment choices however is less, since the median number includes money market funds, fixed income funds, and balanced funds.
With fewer investment choices, employer-sponsored plans limit your ability to take advantage of different market trends and to continually position your retirement savings in mutual funds with superior risk-reward profiles.
If you set up a Rollover IRA with a large mutual fund company such as Fidelity Investments, T. Rowe Price or Vanguard Group, you will break the shackles imposed by your employer-sponsored plan and dramatically increase the number of mutual funds available for investing your retirement savings. Fidelity, for example, provides access to several thousand mutual funds besides the more than 180 mutual funds it manages.
Setting up the Rollover IRA
Let’s say you decide to move your retirement savings to a Rollover account with a mutual fund company. How do you make it happen?
Contact the mutual fund company in which you wish to open an account and ask them to send you their Rollover IRA kit. Complete the form for opening the Rollover IRA account and mail it to the mutual fund company. Next, complete any forms required by the retirement plan administrator of your previous employer and request transfer of your assets into the Rollover IRA account.
You have two choices for moving your retirement savings to your Rollover IRA account. One is to elect to have the money transferred directly from the employer-sponsored plan to the Rollover IRA account. This is called direct rollover. With the indirect rollover alternative, you take the distribution from the retirement plan and then deposit it in the Rollover IRA account. Unless exceptions apply, you have 60 days to deposit the distribution and qualify for tax-free rollover.
Boosting Your Rollover IRA Performance
You need a well thought-out strategy to benefit from the wide range of investment choices available in the Rollover IRA. You can develop the strategy yourself or derive ideas from investment newsletters.
The investment strategy will enable you to maximize return and minimize risk by leveraging the potential of different investment vehicles within each asset class. For example, you can include sector funds among equity investments and international bond funds among fixed-income investments.
Adding to Your Rollover IRA
You can leverage the potential of your Rollover IRA further by adding to it each time you change jobs. With the Rollover IRA already set up, all you have to do is to instruct the retirement plan administrator of your last employer to transfer assets to the Rollover IRA. There is no limit on the amount of money you can transfer.
You may also add money to your Rollover IRA through regular annual contributions. They are however subject to the annual limit for IRA contributions.
Summary
When you are switching jobs or retiring, the Rollover IRA opens a window of opportunity for you, widening the range of investment choices for your retirement assets hitherto not available in the employer-sponsored plan. The self-directed Rollover IRA empowers you to construct and manage a mutual fund portfolio to boost the growth rate of your retirement savings.
Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein.
Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds included in the AlphaProfit Core and Focus model portfolios. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments or other mutual fund companies mentioned in this report. Past performance is neither an indication of nor a guarantee for future results. This document may be reproduced only in its entirety including the author’s bio and hyperlinks to AlphaProfit’s web site.
Copyright © 2006 AlphaProfit Investments, LLC. All rights reserved.
Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. He edits the AlphaProfit Sector Investors' Newsletter™. The investment newsletter, ranked #1 by Hulbert Financial Digest, offers model portfolios that are popular with Fidelity 401k and Rollover IRA investors. To learn more about the investment newsletter, visit http://www.alphaprofit.com
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