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Retirement

The Different Types Of Annuities And How They Work

Annuities have become very popular these days, especially with relatively conservative investors who feel shell-shocked by the recent volatility of the stock market. They are considered relatively safe retirement investments because they are generally (although not always) insulated from the performance of the stock market. However, not all annuities are built the same and not all of them are immune to the twists and turns of the stock market.

For a better understanding of how annuities might fit into your retirement planning, we’ll explain the basic principles of all annuities. Then we’ll define the three most common types of annuities and explain why they’re a good idea for some investors and not for others.

Annuities 101

When an annuity is purchased, the investor gives an insurance company a lump sum of money or sets up a recurring payment plan. In return, the insurance company gives the investor a fixed sum of money each year, usually made in monthly or quarterly payments. The payments can be received for a fixed amount of time or for the rest of the investor’s life. Alternatively, the investor can take a lump sum payment at a pre-determined date in the future instead of receiving the money in monthly or quarterly increments.
The actual amount of money the investor receives is determined by her age, life expectancy, the term of the annuity, the type of annuity, the amount of money she gives the insurance company and the current market interest rates.
The payments the investor receives are generally comprised of a portion of the principal investment made to the insurance company and the interest earned on that investment. The interest earned can either be a fixed rate or a variable rate that is tied to a mutual fund or a stock index. If the interest rate is fixed, the investor will be guaranteed to receive a fixed amount of interest over the life of the annuity and she will be able to calculate exactly how much money she will receive each month. However, if the interest rate is variable, the interest earned will depend on the performance of the underlying mutual funds or stock indices. Annuities with variable interest rates sometimes have caps that limit the amount of interest you can earn or lose.
There are two basic structures for annuities: immediate and deferred.
Deferred Annuities: If someone buys an annuity and wants to start receiving the payments at a later date, the annuity is called a deferred annuity. With a deferred annuity, interest on the money given to the insurance company grows tax-free which increases the total balance that will be paid out over the life of the contract. Taxes aren’t paid on the interest until the distribution period begins.
Immediate Annuities: If an investor gives the annuity company a lump sum of money and wants to receive payments right away, the annuity is called an immediate annuity. The interest that you earn over the life of the annuity will be taxed as it is distributed to you. However, because the payments start immediately, the money in the annuity will not grow as fast as it would if the payments were deferred. Therefore, all things equal, you can generally expect to receive smaller payments from an immediate annuity than you would from a deferred annuity.
Pros

Unlike 401ks and IRAs, there is no contribution limit for annuities.
Annuities can offer long-term or lifetime payments which can provide stable income to those who no longer work or have limited income sources.
They are generally considered safe investments when compared to other investment products.
The interest earned on annuities is tax-deferred until investors begin receiving payments. This allows for the money in the annuity to grow tax free until a distribution is made.

Cons

The fees charged by insurance companies for maintaining an annuity can be significant.
Some investors who choose lifetime payments lose out if they die young because their annuity company can keep the money that the investors’ heirs would have received.
Annuity companies pay large fees to financial advisers and others who sell their annuities to investors. Some annuity salesmen, many of whom don’t have licenses to sell equities and other financial products, sell annuities to people who might be better served by different investment products.
If you make withdrawals before you reach age 59 ½, you must pay the government a 10-percent early withdrawal penalty as well as tax on your earnings.

Variable Annuities

This type of annuity pays a variable rate of interest because of its exposure to investments similar to mutual funds. Instead of receiving a guaranteed fixed rate of interest, a variable annuity investor will receive interest based on the performance of the stocks or bonds that the annuity is tied to. If the stocks and bonds do well, the investor can benefit from a strong interest rate. However, if the stocks and bonds perform poorly, the investor can receive little or no interest on their investment.
Pros

The investor has a level of control and flexibility because he often has a choice of stock and bond funds in which to invest.
There is the potential for more growth compared with other types of annuities.

Cons

Because of its exposure to stock and bond investments, a variable annuity is the most volatile of the three main types of annuities. You can earn little or no interest on your investment if the underlying investments perform poorly.
The volatility can cause stress for investors.
The annual fees can be relatively high.

Fixed Annuities

This annuity pays out a fixed interest rate which guarantees a fixed return on the investment. The guaranteed return makes it very popular with the most conservative of investors.
Pros

Fixed annuities offer a predetermined return. You know what you’re getting, no matter what’s happening with the stock markets.
This type of annuity offers investors peace of mind, which can be a priceless thing.

Cons

There’s no potential for growth. If the stock market experiences growth, you won’t benefit from it.
Fixed annuities have high surrender charges, which are in place to prevent you from withdrawing money early. (Most fixed annuities allow you to access up to 10 percent of the contract value each year without having to pay the surrender charge.)

Indexed Annuities

The interest paid on this type of annuity is based on one or more of the major stock indices. For example, if your indexed annuity is based on the S&P 500 stock index, your return would be similar to the performance of that index.
Pros

It features caps on losses. If your indexed annuity is based on the Dow stock index and the index plummets, your losses will be much lower than someone who owns a mutual fund based on the Dow stock index.
If the underlying index performs well, you could receive a higher interest rate than you would from a fixed rate annuity.

Cons

It features caps on growth, so if your indexed annuity is based on the Dow and it soars, your gains will be much lower than that of an investor with a mutual fund based on the same index.
Annuity companies charge high fees for caps on losses, and many financial advisers consider it to be the most expensive annuity for investors.

Annuities can be a great investment vehicle for some people, particularly those who can’t stomach the ups and downs of the stock market. However, they are probably not the best investment for a younger investor who wants more growth potential in his investment portfolio. Therefore, it’s always a good idea to talk to a financial adviser before buying an annuity. This will help to make sure that the investment aligns with your overall retirement objectives.

What Is The Best Age To Start Collecting Social Security Benefits?

Unfortunately, there is no easy answer when it comes to choosing the right age to start collecting your Social Security benefits. There are several factors that come into play to affect each individual’s decision on the matter. In addition, older adults also have to think about how the total amount of their benefits could change according to the age at which the benefits are first collected. This article will walk you through a few of the key considerations that you might want to think about before choosing when to collect your Social Security benefits.

How Your Benefits Are Affected By When You Start Collecting Them

The most essential thing to understand about Social Security benefits is that the dollar amount that you receive each month and the total length of time that you will receive payments is directly affected by when you begin collecting your benefits. Consider the following examples:

John’s full retirement age is 66. At that time, his monthly Social Security payment will be $1,000. However, he decides to start receiving his payments at age 62. Since he will receive payments over a longer period of time by starting them earlier, his monthly benefit drops to $750.
Sue’s full retirement age is 66 as well, and her monthly benefits at that age will be $1,000. She decides to put off receiving her benefits until age 70. This means that her monthly benefits will rise to $1,320 as a result of receiving the payments later on.

The lesson from these two examples is that, in general, those who put off receiving their Social Security benefits until after retirement receive more money overall. This is due to delayed retirement credits which are awarded to those who postpone receiving their benefits past their full retirement age.
Since Social Security benefits last as long as you live, it may be in your best interest to put off receiving benefits if you can so that you receive a higher payment for longer. According to CNN Money, delaying your payout as long as possible pays off as long as you make it to age 77. This allows for the delay in payments to be made up for with higher payments over time.

Weighing Your Options

The toughest part about choosing the age at which you want to start getting Social Security benefits is taking into account all of the different factors which may be at stake. The following are all matters which need to be considered before making a decision about when to start collecting your benefits:

Life Expectancy: Some individuals believe that receiving benefits earlier is better since they will be receiving money for more years. However, if you put off collecting your benefits and you live past your mid-70s, the amount of Social Security benefits that you receive will be significantly greater than if you had opted for the early payout. According to Social Security Online, about one out of every four 65-year-olds today will live past age 90. If your family members have lived into their 80s or 90s, it may be better to delay receiving benefits since you will need the extra money more in your later years.
Health: Considering your health is one of the top priorities when deciding the right age to start getting Social Security benefits. Those with poor health may want the money sooner to help pay medical expenses or to start saving money to help loved ones after they are gone.
Health Insurance: Keep in mind that retiring early to receive Social Security benefits may mean that you are losing your employer provided health insurance. Since most individuals are not covered by Medicare until age 65, it’s critical to think about how you will pay for health insurance or medical costs if you do take Social Security benefits early. Even if you are delaying payments and plan to continue working, you should still sign up for Medicare three months before you reach age 65 to avoid delayed coverage and higher premiums.
Work: Once you reach your full retirement age, you can still work and receive Social Security benefits. According to the Social Security Administration, work earnings in or after the month you reach your full retirement age will not lower your Social Security benefits.
Family Members: Be sure to consider how your decision about when to start collecting Social Security benefits will affect your family. If you die before your spouse, they may be eligible to receive a survivor benefit. Children under the age of 18 or that have a disability may also be eligible for these benefits. If you begin receiving Social Security benefits early, your spouse and children may not receive a full benefit.

There are a number of important things that factor into the decision about when to start receiving Social Security benefits. For more information, visit www.ssa.gov and talk to a financial advisor to figure out when is the best age for you to start collecting these benefits.

5 Important Tips To Save For Retirement

The recession and the sluggish economy that followed have been blamed for causing untold numbers of 60-somethings to postpone their retirement and continue working. Many would-be retirees blame themselves for not having enough money to retire. Many look back on their savings habits and realize they made a series of mistakes that ended up dramatically shrinking their retirement nest eggs.

And now in hindsight retiree wannabes are sharing their experiences in the hopes of educating others. Here are five tips from retirees and financial advisers that we all would be wise to heed.

Start Saving Early

This is a big regret of older investors, many of whom waited until their 30s or even 40s before they started saving for retirement. Let’s consider two fictitious savers who represent lots of people. Mary started saving $1,000 a year starting when she was 22 years old. She enjoyed an annual rate of return of 8 percent – the historic rate of return for the stock market. After saving for 45 years, Mary decided to retire at 67 and ended up with $287,522. John also saved $1,000 a year, with the same rate of return, but he didn’t start saving until he was 42. After 25 years of saving, John also decided to retire at 67, but his nest egg was only $65,642. If those numbers don’t make you want to start saving today, maybe nothing will.

Save More

The other big saving-related regret that retirees often mention is that they should have – and could have -- saved a lot more over the years, but for whatever reason, they didn’t. Let’s look at Mary again and at Tom, another saver. Remember that Mary put away $1,000 a year for 45 years and ended up with a nice little nest egg of $287,522. Tom also started saving at 22, enjoyed the same historic rate of return and also decided to retire 45 years later, at age 67. But Tom chose to invest $5,000 a year, not $1,000. He ended up with $1,437,610. Enough said.

Don’t Underestimate Your Future Expenses

Surveys that question retirees about their savings usually conclude that about a third of them say their expenses are higher than they budgeted, and only one out of 10 says his/her expenses are lower than projected. Many people assumed they would eat out and drive less frequently as retirees and spend less on travel and household expenses, said Pat Black, a financial adviser from Texas. You can get a better handle on your future expenses by making a complete list of your current expenses, crossing out those that will end when you stop working and adding those that you’ll have during retirement that you don’t have now. Figure in the inflation rate and try to live on that budget for at least a few months before you retire.

Don’t Invest Too Conservatively

There is a time to invest conservatively, and it’s not when you have 20, 30 or 40 years left before you retire. A recent Consumer Reports survey found that conservative investors ended up with only 77 percent of what aggressive investors earned, and moderate risk takers made 91 percent of what aggressive investors made. Financial advisers usually recommend that investors take more risks when they’re young, and then as they get closer to retirement age, weigh down their portfolios with less volatile investments, such as bonds and certificates of deposit. Investors with, say, $100,000 to invest during a five-year period can put it in a five-year jumbo CD, which pays about 1.5 percent and end up with $106,540. But if they put that money in the stock market for five years and receive an 8-percent historic rate of return, they’ll end up with $138,949. That difference -- $32,409 – is enough for many people to live on for a year.

Diversify

Financial advisers preach diversification, and here’s another reason why: In the Consumer Reports survey, retirees who invested in only one, two or three financial products ended up with only 46 percent of what those with seven or more types of investments earned. This held true whether savers were poor, middle class or wealthy. They did better the more they diversified. If you have your money in only a few types of investments, consider talking with a financial adviser, most of whom will meet with you for free. If you decide to work with a financial adviser – some investments can be made only with the help of a professional – you may want to hire one on a fee-only basis.
The bottom line is that it is never too early to start saving for retirement. Get started now and save as much as you can on a regular basis. You’ll be handsomely rewarded when it’s time to retire.

Traditional VS Roth: Which 401k Retirement Plan Should You Choose?

An increasing number of employers are offering their employees the option to choose between a traditional 401k and a Roth 401k. If this option is available to you, you will need to fully understand the key differences between each type of 401k before you can make an informed decision. Understanding the key differences will allow you to properly evaluate the pros and cons associated with each type of retirement plan.

Key Differences Between A Traditional And A Roth 401k

Your Contributions Are Taxed At Different Times

Your contributions to a traditional 401k are not subject to state or federal income taxes during the year in which they are made. Instead, your contributions are allowed to grow tax deferred until you pull money out of the account at retirement. When you withdraw money from the account at retirement (or before if you withdraw funds early), you will have to pay federal and state income taxes on the withdrawn funds. The tax rate you will pay will depend on which tax bracket you fall into when you make the withdrawal.
With a Roth 401k, your contributions are subject to federal and state income taxes in the year you make the contribution. You will be taxed at the tax rate you are at when you make the contribution. However, you do not have to pay any income taxes on the funds when you withdraw them at retirement. Because your contributions are taxed before they hit your account, your take home paycheck will be less if you opt for a Roth 401k than it would be for a traditional 401k.

Annual Required Minimum Distributions?

If you have a traditional 401k, once you turn 70 ½ years old, you are required to withdraw a minimum amount of funds from your 401k each year.
Technically, Roth 401ks have annual required minimum distributions. However, if you roll your Roth 401k into a Roth IRA before you turn 70 ½ years old, you can avoid having to take minimum distributions.

Similarities Between The Two 401k Retirement Plans

Same Contribution Limit: Both are subject to the same annual contribution limits. For 2012, this limit is $17,000 if you are under 50 years of age and $22,500 if you are 50 years of age or older. If you contribute to both a traditional and a Roth 401k during the same year, your total annual contribution across both accounts cannot exceed the annual contribution limit.
Same Investment Structure:Both types of plans have the same investment set up. You can generally choose from a buffet of investment options. Many plans offer age based investment options which make your portfolio more conservative as you get closer to retirement.
Same Early Withdrawal Penalties: If you pull your money out early, you will likely be subject to an early withdrawal penalty. However, many 401k plans will allow you to take out a loan from your 401k funds without incurring a penalty.

Which Plan Should You Pick?

There are two important factors to take into account when making this decision.

What Do You Think Your Tax Rate Will Be When You Retire? Given that no one can predict the future, there is no way to be certain about what your tax rate will be when you retire. However, you may be able to make an educated guess based on your career trajectory, life plans and the current actions of Congress. The bottom line is that if you think you will be in a higher tax bracket when you retire, you might want to consider a Roth 401k since you will be taxed now at a lower tax rate. If you think that your tax rate will drop when you retire, you should consider a traditional 401k. If you want to hedge your bets, you can contribute to both types of accounts. Just remember that your total annual contributions to both accounts cannot exceed the annual limit.
Do You Care About The Required Minimum Distributions? If you have a traditional 401k, you will be required to take a minimum amount of money out of the account every year after you turn 70 ½. If you would prefer that your money stay in an investment account to grow and earn additional interest, you might want to look into a Roth 401k which can be rolled into a Roth IRA.

If your employer offers both types of 401k plans, you should do your homework before making a final decision. This will allow you to get the best tax benefit when you retire.

Understanding 403(b) Retirement Plans

Given their growing popularity over the last several decades, you probably know what a 401(k) retirement plan is. However, you might not know that people working in the public or non-profit sectors are general ineligible for a 401(k) plan. Instead, people working in these sectors can enroll in a 403(b) individual retirement plan. The 403(b) is similar in many ways to the 401(k), but differs in who is eligible to enroll in it.

What Is A 403(b)?

Like a 401(k), a 403(b) account is considered to be a "tax-sheltered annuity" by the Internal Revenue Service. This means that any contributions plus accumulated interest earnings can grow tax-free until the funds are withdrawn during an individual's retirement.
Under a 403(b) account, eligible employees can direct their employers to set aside a percentage of their salary toward the account. Employers may also choose to match these funds.

How Is A 403(b) Different From A 401(k)?

Generally speaking, the major difference between a 403(b) and a 401(k) is who is eligible for each type of plan. 403(b) accounts are offered to employees of nonprofit organizations such as educational institutions, hospitals and religious organizations. 401(k) accounts are typically designated for for-profit corporations and businesses. Otherwise, the accounts operate the same way, with a few minor differences. According to TIAA-CREF, eligible employers that can offer 403(b) plans include:

Private colleges and universities
Independent schools
Research organizations
Teaching hospitals
Churches
Charitable organizations
State universities
Community colleges
K-12 public school systems

What Are The Annual Contribution Limits?

Like 401(k) plans, 403(b) plans have annual contribution limits. Participants in 403(b) plans were allowed to contribute up to $16,500 in 2011 and $17,000 in 2012, according to 403(b)wise, an information source for participants, employers and financial advisors.
If you are 50 years of age or older, you are allowed to contribute an additional $5,500 per the IRS's "catch-up rule."
There is also a provision for employees with at least 15 years of service with their current employer who have contributed less than $5,000 per year. They may contribute an additional $3,000 per year to a lifetime maximum of $15,000.
It is important to note that these contribution limits are quite high compared to a traditional IRA, which is limited to $5,000 per year.

What Are The Investment Options?

Investment options for 403(b) plans mirror those for 401(k) plans. You can usually choose from a large buffet from investment options. Many plans offer investment options which allow you to reduce your portfolio risk incrementally as you get closer to retirement age. The key is to make sure that you diversify your investments to reduce your overall portfolio risk. This involves picking a diverse mix of stocks and bonds.

When Can Funds Be Withdrawn From A 403(b)?

Similar to a 401(k), you cannot withdraw money from a 403(b) without paying a penalty unless:

You are at least 59 1/2 years old or
You become disabled or
You encounter financial hardship or
You have a qualified reservist distribution

Loans Against A 403(b) Account

People can take loans from their 403(b) accounts, but they must repay funds – including interest – within five years of taking out the loan. However, if they take out a loan for the purchase of a new home, they have 30 years to repay the loan. Loans that are not repaid within the required time period are subject to a stiff 10 percent penalty.

What Happens If You Get A New Job?

If you change jobs and are no longer employed by a 403(b)-eligible employer, you have a number of options available for your retirement nest egg, according to 403(b)wise. Your options include:

You can leave the money in the plan, as is;
You can transfer the funds to your new employer's retirement plan;
You can move the funds to a Rollover Individual Retirement Account (IRA);
You can take a lump sum distribution. Note that if you are not age 59 1/2, you may be subject to early withdrawal penalties.

What About The Roth 403(b)?

Employees may also choose to contribute to a Roth 403(b), which allows them to designate some or all of their 403(b) savings as post-tax contributions. If you believe that your rate of taxation is lower now than it will be at your time of retirement, the Roth savings may be a better vehicle for you since your contributions will be taxed at today’s tax rate.
People may choose to make pre-tax 403(b) contributions, Roth 403(b) contributions or a combination of both types of accounts. However, not all employers offer the Roth option.
The bottom line about 403(b) plans is that they are very similar to 401(k) plans. If you work in the public or nonprofit sector, make sure you do your homework before you make your retirement investment.

Health Care And Dental Advantages For AARP Members

Are you 50 years of age or older? Are you unsatisfied with your current health care or dental coverage? If you answered yes to both of these questions, then you should seriously consider becoming an AARP member. AARP membership can help you save money on your insurance by helping you find the health and dental coverage that best fits your needs. If you are already an AARP member, but have not looked into the health and dental offerings available with your membership, now is the perfect time to get up to speed.

What Is AARP?

Formerly known as the American Association of Retired Persons, AARP is a non-governmental organization that looks out for and protects the interests of its 40 million-plus members. Although technically anyone can join AARP, the organization is primary tailored for individuals who are at least 50 years of age. Therefore, it is not a surprise that in order to receive the full benefits of membership, you must be at least 50 years old. Note that you do not need to be retired to join AARP or to receive the full benefits of membership. There is a modest membership fee required to join AARP. This fee must be repaid every year in order to renew your membership. However, there are multiple yearly membership fees which offer a slight annual discount.

What Are The Key Benefits Associated With Joining AARP?

There are several key benefits associated with being an AARP member. These include:
Exclusive Discounts: Because of its size and connections, AARP is able to offer numerous discounts to its members. This includes discounts on:

Groceries
Dining And Entertainment
Retail Shopping
Travel
Home Security
Car Rentals And Roadside Assistance
Gym Memberships
Insurance Products

Current Information And Advice On Topics That Are Important To Members: In addition to the discounts, AARP also publishes helpful information and advice that its members can utilize. Topics include:

Insurance And Health Products
Financial Services And Products
Home And Garden
Food And Travel
Technology
Entertainment
Volunteering Opportunities
Economic Issues
Local, National And Global Politics
Environmental Issues
Personal Growth And Relationships
Work And Retirement

A Powerful Lobbying Force: Because of its size and substantial asset base, AARP is a significant lobbying force in Washington D.C. as well as in local and state politics. Given the demographics of its membership base, much of AARP’s lobbying efforts are concentrated on promoting the interests of individuals who are at least 50 years of age. Practically speaking, this means that AARP spends a lot of time trying to ensure that Medicare and Social Security benefits are not reduced by the federal and state governments.

The Heath Care And Dental Benefits Of AARP Membership

Now that you know what AARP is and what it does, it’s time to look at the health care and dental benefits that its members receive. It is important to note that AARP is not an insurance provider. Rather, it partners with insurance companies to provide affordable health and dental care solutions for its members.
Health care benefits include:

Clear and concise explanations about the health care options available to its members.
Helping members who are not yet eligible for Medicare find affordable and effective health insurance.
Helping members who are eligible for Medicare understand all of their coverage options so they can make the right decisions.
Assisting members who want additional health insurance coverage.
A prescription drug discount program.
A fitness and wellness program.

Dental care benefits include:

Helping members select an appropriate dental plan for their situation.
Keeping members apprised of current developments in modern dentistry.

Cautionary Note

While AARP is a great resource for helping you to find the best health care and dental insurance coverage, you should note that AARP receives a significant amount of money from health care and dental insurers to endorse their products. Therefore, in addition to taking a look at the AARP recommendations, you should also make sure to shop around outside of the AARP recommended products to make sure that you get the best deal possible on your insurance. While you might ultimately select an AARP recommended plan, it is still a good idea to seek out and evaluate all of your options before selecting coverage.
If you are at least 50 years old and are not satisfied with your current health or dental insurance plans, you might want to consider becoming an AARP member. AARP is very helpful in explaining the different types of plans available to you depending on your age and current coverage. AARP can also recommend individual coverage plans that it endorses. Just make sure that you do some outside research to make sure that you end up with an affordable plan that suits your needs.

Investment Planning Tips For Your Individual 401(K)

Retirement may feel like it's a lifetime away, but starting to save for your future at the beginning of your career is one of the smartest financial moves that you can make. Every dollar that you put away for your retirement now will pay you back many times over when you retire.

The best place to start saving for retirement is through your workplace 401(k).
Here are four steps to help you get started saving for your future by opening your first 401(k):

Decide How Much To Invest

Many companies match employees' 401(k) contributions up to a defined percentage of their salary. Find out if your company has a matching contribution program and what the match limit is. “For plans with an employer matching contribution, you should contribute at least enough to get the entire employer match,” said John Olson, Financial Consultant for LPL Financial. “For example, if the plan matches 50 percent of the first 6 percent you contribute, then you should contribute at least 6 percent. If you don't, then you are leaving free money on the table.”
The match limit is the minimum you should contribute. Olson recommends that future retirees aim to contribute at least 10 percent of their overall pay to their 401(k). However, if you cannot start with that amount, contribute what you can and increase the amount as soon as possible.

Find Room In Your Budget To Invest

Since money can be tight when you enter the workforce, you may be wondering how you can afford to invest in your 401(k).
Go through your monthly budget and determine areas where you can cut back on spending. Each small sacrifice that you can make now will be well worth it for your financial future.
Each time you receive a raise or cost of living adjustment, increase your 401(k) contribution before you adjust your lifestyle to the higher salary. You should also set a higher contribution percentage for any bonus pay to also help increase the funds in your retirement account.

Choose A Roth 401(K) Or A Traditional 401(K)

If your employer offers both a Roth 401(k) and a traditional 401(k) program, determine which type of plan works best for your situation. One of the biggest differences between the two plans is that in a traditional 401(k), you contribute money pre-tax and pay taxes when you withdraw the money at retirement. In a Roth 401(k), your contributions are made after tax, but your withdrawals are tax-free.
“If you are just beginning employment, consider contributing to the Roth 401(k) if your employer offers this option,” said Olson. “You'll have to pay tax at some point, so it may be better to do this now to avoid paying higher taxes in the future."

Determine Your Risk Appetite

Your next choice will be which funds to invest in within your company's 401(k) plan. When you enroll, you will receive a list of different funds and options within the funds. While the common advice is to take more investment risk when you are young, it can be challenging to know how much risk is advisable and which risks are worth taking.
Ted Jenkin, Co-CEO and Founder of oXYGen Financial, recommends acting your age with your investing. “In general, you should have your current age represent the percentage of your money in bond type investments, and then subtract your age from 100 to see what percentage to put in stock type investments,” said Jenkin. For example, if you are 20 years old, put 20 percent of your investments in bonds and 80 percent in stocks. As you get older, be sure to adjust the balance between stocks and bonds to decrease the risk.
You may be tempted to simply select the default stocks and mutual funds for your plan, but consider doing your own research to find the best performing funds. Olson recommends gathering third party reviews of mutual funds by experts, such as Morningstar and Lipper, comparing their performance to other similar funds and using this information to make your selections.
After you have set up your 401(k) account, monitor your investments to make sure that they are performing well. Remember that these are long term investments so it is unwise to make adjustments based on normal market fluctuations.
When you retire many years from now, you will be very glad that you took the time and made the sacrifices to begin investing at a young age. The time spent researching options will help you to create a secure financial future for yourself and your family.

Tips On How To Retire Early

Many people dream of retiring early. However, actually achieving this goal takes a lot of planning and dedication.

The most important step to retiring early is determining the specific age at which you want to retire. Rob Drury, Executive Director of the Association of Christian Financial Advisors, advises that people need to begin preparing early. “While it runs counter to our culture and the nature of youth, there are people in their twenties who save with retirement and/or contingencies in mind,” said Drury. “Even if one's retirement goals aren't met particularly early, early preparation will ensure a secure retirement by preventing unexpected financial issues from becoming catastrophes.”

Determine How Much You Will Need Each Month

You cannot plan an early retirement without a clear picture of how much money you will need to live on each month after you retire. Make a list of your expected monthly expenditures. Include insurance premiums that you will need to pay until you are eligible for Medicare and be sure to factor in increased medical bills as you age.
You will also need to determine the type of retirement lifestyle that you want to have when making your list. If you want to retire early to play golf every day or take trips around the world, then you need to factor in these expenses. If you determine that you cannot cover the costs of your desired retirement lifestyle, then you might consider working for a few extra years to save more money.

Become Debt Free

While saving money for retirement is an important step, reducing your debt load is also crucial. If you have credit card debt, you should start working on zeroing out your credit balances.
You should also try to increase the rate at which you are paying off your mortgage and other loans. Getting rid of your mortgage payment and other loans significantly reduces your monthly expenses.
As you near your desired retirement age, avoid adding new debt that will not be covered by your post retirement income.

Save A Considerable Amount Of Your Monthly Income

It will be difficult to retire early if you are only saving a minimal portion of your monthly income. Since early retirement is an ambitious goal, it requires determination and discipline. Many people find that simply trying to save money isn’t as successful as having a set amount of savings to deposit each month. Elle Kaplan, CEO & Founding Partner of Lexion Capital Management LLC, recommends spending one paycheck each month and saving the other one.
“From a financial perspective, the best way to retire early is to accumulate savings rapidly, invest wisely, and maintain low monthly expenses in spite of the ability to spend more,” said Noah B. Rosenfarb, CPA and holistic financial advisor. He suggests growing your savings until you are saving 30 percent of your income. He also advises that you save 50 percent of any raises or bonuses that you receive.
Becoming used to a fixed income and watching your spending will help you be successful at living on a budget during your retirement years.

Invest Wisely

It goes without saying that someone planning to retire early should invest in a retirement plan. But to exit the workforce before age sixty, you will also need to make additional investments and make those investments wisely. “As far as early retirement savings, tax-qualified retirement plans are not sufficient for early retirement, as one normally incurs penalties and taxation for withdrawals prior to age 59.5,” said Drury. He recommends investing in corporate stocks and bonds, municipal securities and cash life insurance for those planning to retire early.
When selecting stocks and bonds to invest in, you should consider investing in companies with long track records of steady and strong performance instead of the “hot stock of the day.” You should also keep your portfolio diversified, spreading your investments across global markets and industries. “Let the advantage of time help you get where you want to be and you can own high quality companies for the long haul,” said Rosenfarb.

Consider Part-Time Income

Oftentimes when people dream of retiring early, they do not picture getting a part-time job after leaving their full-time job. But the reality is that many early retirees find part-time work for both financial reasons and for meaningful ways to spend their days. Working part-time can also help you bridge the gap between your previous employer's health plan and Medicare coverage if you have an employer who offers benefits for less than full-time employment.
“From an emotional perspective, try to find work you enjoy that you would not want to stop doing,” said Rosenfarb. “You may find that at some point you can "retire earlier" from the work you do not enjoy and transition to work that is pleasurable -- using the assumption that the smaller income can be with you to supplement your retirement income.”
Retiring early requires a lot of discipline and determination. However, with the right planning, you can start your golden years early.

The Rules For An Inherited IRA

So, you’ve inherited an IRA from someone. That’s great, but there’s a lot at stake. Manage it well and the amount will represent a secure nest egg for you and your family. Make the wrong moves and it may vanish quickly, and you may be left with a big, fat penalty from the IRS.

There are a lot of things you must know to make the right decisions about how to preserve and access the funds. Consider the following to be a condensed checklist.

Are You Designated As The Beneficiary?

Is the IRA really yours to use? It may have been left to you in a will or in a living trust, but are you listed as the recipient on an IRA beneficiary designation form? This form almost always takes precedence over a bequest made on any other document. You need to see that form. If you’re the beneficiary, chances are you have it or know where to find to it. But if you’ve misplaced it or you never had it, ask the financial services firm that is holding the IRA’s assets. It will have that document.
If the beneficiary listed on the form is dead, the IRA’s assets will go to the contingent beneficiary, if one is named. If there isn’t a contingent beneficiary named, the IRA most likely will go to the estate.
Next, learn about the rules for inheriting an IRA. They’re different, depending on if you’re the spouse or a child or someone else.

Are You The Spouse Of The Original IRA Owner?

If you’re the spouse, you have three options:
Roll Over The Assets Into A Beneficiary IRA: If you do this, you may withdraw money from the IRA based upon your own life expectancy and you can wait until the year in which the original IRA owner would have turned 70½ years old to start taking required withdrawals from the IRA. The withdrawals, known as required minimum distributions, are calculated for each account by dividing the balance on Dec. 31 of the previous year by a life expectancy factor that the Internal Revenue Service publishes in Publication 590.
Convert It Into Your Own IRA: If you don’t have one, you can create one for this purpose and contribute to the account to delay required minimum distributions until you turn 70½. If you withdraw money from the IRA before you reach age 59½, you likely will be subject to a 10 percent early-distribution tax, though exceptions may apply. If the IRA is a Roth IRA, the surviving spouse should ask if he or she is able to receive tax-free income earlier than the five-year waiting period.
Disclaim All Or Some Of The Assets In The IRA: If you don’t want the money or don’t need it, then the money can go to the contingent beneficiary, and you can reduce your income and estate taxes.

If You Are Not The Spouse

The options for a non-spouse are a bit murkier, and accountants and financial advisers often differ on the best approach.

Re-Title The IRA

You may ask your financial adviser to help you re-title or re-register the IRA so you can rollover the assets to your IRA. This re-titling also lets the IRS know that it is an inherited IRA. You need to do this by Sept. 30 of the year after the year in which the original IRA owner died. If you don’t bother to re-title the inherited IRA funds and simply deposit them into your IRA, the money you inherited will be treated as taxable income. Even if it’s a small amount, this tactic is unwise.
If you’re not the spouse, you can’t contribute to an inherited IRA, and you can’t postpone the required minimum withdrawals, but you won’t get taxed on the IRA until after you start making withdrawals. If you don’t need the money from the IRA, you still have to take the minimum withdrawals.

Make Sure You Take The Minimum Distributions

Don’t make the mistake of doing nothing. If you don’t start taking these required withdrawals by Dec. 31 of the year after the year the IRA owner died, the IRS will penalize you by taxing the amount you fail to withdraw at 50 percent. The penalty may be waived if the account owner establishes that the shortfall in distributions was due to a “reasonable error.” In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.
The good news is you may be eligible for a tax break if you’re withdrawing money from an inherited IRA. The IRS calls this money “income in respect of a decedent.” You may be able to receive an income tax deduction for the portion of the estate tax attributable to the inherited IRA. For more detail, see IRS Publication 590.
If more than one person is inheriting the IRA, you may be able to divide it into multiple IRAs.
If you inherit an IRA, do your homework and consult with a trusted accountant or financial adviser. The more you know, the better off you’ll be.

Differences Between Roth And Traditional IRAs

Individual retirement accounts (IRAs) provide a relatively safe way to grow your money for retirement and they offer significant tax advantages.

There are two types of personal retirement accounts you can open: Roth and traditional IRAs. Understanding each account and their differences helps you determine which IRA is best for your financial situation and retirement plans.

Traditional IRA Basics

A traditional IRA is a personal retirement savings account held at a bank or a brokerage firm that can be funded with investments such as stocks, bonds and mutual funds offered through the financial institution where your account is held. Traditional IRAs provide tax savings, including tax-free growth of earned interest, dividends and capital gains while the money is in the account. You also usually claim a tax deduction each year that you make a contribution to a traditional IRA. While your contributions to a traditional IRA are not taxed, you pay have to pay taxes when you remove the funds from the account at retirement.

Roth IRA Basics

A Roth IRA is a personal retirement savings account also held at a bank or brokerage firm that can be funded with a wide variety of investments, including stocks, bonds and mutual funds. Roth IRAs also offer tax savings, including tax-free growth of earned interest, dividends and capital gains while the money is in the account. Contributions made to a Roth IRA are taxed before they reach the account, but you are not taxed when you withdraw the money. Withdrawals of contributions are tax free after the Roth IRA has been open five years, and you can withdraw investment earnings tax free after you reach the age of 59 ½.

Traditional Vs. Roth IRAs

When it comes to investments, traditional and Roth IRAs work the same way. You fund the IRA and then move the money into various investments. With both types of accounts, the interest, dividends and capital gains grow tax free. If you are employed and earning an income, you can currently contribute to both types of accounts up to $5,000 per year until the age of 49 and $6,000 per year if you are 50 or older. Contributions to either type of IRA must come from taxable income earned from working. However, there are several important differences between traditional and Roth IRAs.
Consider the following differences when making a decision regarding which type of IRA is right for your financial situation.

Tax Deferral

Traditional: Contributions are taxed at the prevailing tax rate when money is taken from the account at retirement. Your contributions are not taxed when you initially deposit them into your account.
Roth: Because your contributions are taxed before they land in your account, you money is not taxed when it is removed from the account.

Age Limits

Traditional: No contributions are allowed once you reach age 70 ½.
Roth: No age limits exist on contributions.

Income Caps

Traditional: Anyone with a taxable income can contribute to a traditional IRA, no matter how much they earn.
Roth: There are income limits for contributing. In 2011, single individuals with a modified adjusted gross income of $125,000 and higher could not contribute to a Roth IRA.

Tax Deductibility

Traditional: Contributions may be tax deductible. Eligibility is dependent on a variety of factors including whether you are currently participating in an employer-sponsored retirement plan such as a 401(k), SEP IRA or SIMPLE IRA. Enrollment in one of these pans can limit or preclude tax deductibility.
Income also dictates if and how much a person can deduct. In 2011, for instance, an individual filing single or as head of household with no active participation in an employer-sponsored retirement plan who earned $56,000 or less in modified adjusted gross income could fully deduct all contributions to a traditional IRA. Individuals earning from $56,000 to $66,000 got a partial deduction, and those earning more than $66,000 had no deduction.
Roth: No contributions are tax deductible.

Required Minimum Distribution (RMD)

Traditional: Account owners must begin receiving minimum distributions of money in the account on April 1 of the year following their turning 70 ½-years-old.
Roth: No RMD.

Early Disbursement

Traditional: If you pull money out of the account before the age of 59 ½, you will be subject to an early distribution penalty. Exceptions to the early disbursement penalty rule include withdrawing money in order to pay for college expenses, medical costs greater than 7.5% of your adjusted gross income and expenses due to sudden disability. You can also withdraw up to $10,000 penalty free for a first-time home purchase. Finally, there are no penalties if you transfer the money into another type of retirement account.
Roth: After the account has been open five years, you can withdraw any money you deposited into the account without incurring a penalty. You will, however, usually pay a penalty if you withdraw investment earnings before the age of 59 ½.

Deciding Which Account Is Best for You

If you do not meet the income requirements for a Roth IRA, a traditional IRA is your only choice. Otherwise, you need to take a few factors into consideration when making your decision.
If you want to take advantage of the tax deductibility of your IRA contributions, you might consider choosing a traditional IRA. Opting for a traditional IRA also makes sense if you expect to be in a lower tax bracket when you retire, because you will pay less taxes at that time than you would now.
However, the flexible benefits of a Roth IRA may make it a more appealing choice. You might benefit from your ability to withdraw contributions without penalties. You might also prefer to have no minimum distribution requirements. Finally, if you expect to be in a higher tax bracket when you retire, choosing a Roth will allow you to get your contributions taxed at a lower rate now, and you won't have to worry about taxes later.

Splitting Your Contributions

If you are eligible for a Roth and traditional IRA, you may find it advantageous to split your maximum contribution between the two by depositing the tax deductible amount of your income into your traditional IRA and the remainder into a Roth. When considering doing this, factor in potential additional costs such as fees associated with funding both accounts. Your total contributions to both IRAs can’t be more than your limit for the year.
Now that you’re armed with the facts when it comes to Roth and traditional IRAs, you can use them to your advantage when planning for your retirement years.

What You Need To Know About An IRA Investment

Saving for retirement helps ensure that your golden years are indeed golden. One of the best ways to stash cash for retirement is opening and funding an individual retirement account. Commonly known as an IRA, this savings vehicle offers you a relatively safe place to invest your nest egg.

What Is An IRA?

An IRA is a retirement account into which you deposit stocks, bonds, mutual funds and other assets. These assets are then allowed to grow on a tax deferred or tax free basis. Ideally, the investments in your IRA will grow in value over time accruing a substantial amount of money for your retirement years. You can open an IRA in addition to other types of retirement accounts, such as employer-sponsored 401(k)s.
Several types of IRA accounts exist, including traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs. Traditional and Roth IRAs are personal retirement accounts that offer different tax advantages. The money deposited into a traditional IRA is not taxed at the time of deposit, but is taxed when you remove the money. Roth IRA deposits are taxed when you make the deposit, but you pay no taxes when you withdraw the money. SEP IRAs are for self-employed individuals and SIMPLE IRAs are designed for small employers to offer their employees.

How IRAs Work

You are eligible to open and contribute to a personal IRA if you or your spouse (if you filed jointly) received taxable income during the year, and you were not age 70 ½ by the end of the year. Allowable income for contribution purposes includes wages and salaries, commissions, self-employment income, alimony and nontaxable combat pay.
A variety of financial institutions offer IRAs, including banks, savings and loans institutions, credit unions, brokerage firms and mutual fund companies. When you open an IRA, you deposit a specified amount of money and choose from various investments. Most IRA providers offer a variety of investment opportunities, including stocks and bonds, mutual funds, money market funds and CDs. This allows you to take advantage of a diversified mix of investments, which is a safe practice with your retirement money.

Deposits and Withdrawals

You can currently deposit up to $5,000 per year if you are 50 and under and $6,000 per year from 50 until the age of 70 ½. There are income limits that determine how much you can contribute to a Roth IRA, but none exist for a traditional IRA. Single filers who make in excess of $125,000 per year and joint filers earning more than $183,000 per year may not contribute to a Roth IRA in 2012.
You can withdraw money from your traditional IRA at any time, but you will have to pay a 10 percent penalty on the money you withdraw if you are younger than 59 ½. You will also have pay income tax on the money you withdraw. After 59 ½, you can withdraw funds without paying a penalty, but you will still have to pay income tax on the amount withdrawn. You must start withdrawing minimum distributions from an IRA each year when you turn 70 ½.
You can withdraw money from a Roth IRA before the age of 59 ½ without penalty providing that you only withdraw from the deposits that you put into the account, not any earnings. There are no minimum distribution requirements for Roth IRAs.
A few exceptions exist to the 10 percent penalty rule. You can withdraw money from an IRA without being penalized in order to pay for college expenses, medical expenses greater than 7.5 percent of your adjusted gross income, up to $10,000 for a first-time home purchase and costs arising because of a sudden disability. You can also avoid penalties if you withdraw the money to roll over into another type of retirement account, such as from a traditional IRA to a Roth IRA.

The Benefits Of An IRA

An IRA’s biggest benefit is that your investments in the account grow on a tax deferred or tax free basis. This allows your money to grow faster than if you had to pay taxes on it each year.
Additionally, the 10 percent penalty for early withdrawals also reduces your incentive to pull money out of your account. This helps to ensure that you will have sufficient funds on which to live when you retire.

It's Not Free To Open And Maintain An IRA

Banks and other financial institutions have varying fee structures for IRAs so it’s a good idea to shop around. Some companies charge an annual account maintenance fee of $25 to $30, while others do not. There are also commission fees, which can range from as little as $7 to over $40.

Tax Planning

You can open an IRA at any time of the year, but the money must be filed by the tax filing due date. If you deposit money into an IRA after the due date, it will be considered a contribution for the following year's taxes.
Now that you understand the benefits and basics of opening an IRA, you can make informed choices that are likely to help you enjoy full, vibrant retirement years.

6 Things You Didn't Know About Early 401k Withdrawals

Whether you're leaving a job or facing financial hardship, the temptation may arise to cash out your 401(k) retirement plan early. Depending on the circumstances, it might even be the best course of action.

Your 401(k) is an employer-sponsored retirement account, fed by agreed-upon reductions from your paychecks and meant to grow over time. Typically, when you leave the employer that operates your 401(k), you roll it over to a new employer or into an Individual Retirement Account (IRA).
Sometimes, however, for a variety of reasons, you may want to get to that money sooner than retirement.
Unlike standard checking and savings accounts, accessing 401(k) funds comes with many catches. There are rules to slow down the process and penalties to dissuade all but the most dedicated early withdrawers. It's enough to give one pause ... and maybe rightly so.
This post will guide you through the typical 401(k) early-withdrawal process and it will highlight the complications that can arise if you proceed with the idea. Read on to understand the potential pitfalls of touching those retirement savings too soon.

1. How Early is "Early"?

Put simply, any time before age 59 ½ is the time-frame in which early 401(k) withdrawals incur penalty fees.

2. Can Anyone Withdraw Early?

Not exactly. Would-be withdrawers have to show the government that they're operating under a hardship and really need that 401(k) money. Acceptable reasons include:

To cover medical expenses
To cover funeral expenses
To buy a house
To avoid foreclosure or eviction from your primary residence
To pay a college tuition bill that's due within 12 months

Some plans allow for additional flexibility when it comes to what defines a hardship. So, turn to the documentation that your employer provides regarding your 401(k) account and be prepared to show documents that prove you can meet one of the hardship rules for withdrawing your money.

3. What are the Fees?

Account holders younger than 59 ½ pay a 10% fee calculated on the total 401(k) monies that are withdrawn.

4. Taxes on Early 401(k) Withdrawal

The Internal Revenue Service won't tax 401(k) funds while they're in your account, but it will tax every dollar that you withdraw from it, no matter what your age is when you take it out. The bottom line is that the money is always treated as income.
So whenever you elect to withdraw those retirement funds, have a plan in place to deal with the IRS. Either be ready for a large lump sum demand on your next tax bill or set up an installment plan to lessen the blow. BackTaxesHelp.com publishes this helpful guide to making installment payments to the IRS.

5. Are There Any Fee Exceptions?

When it comes to fees, exceptions are made for qualifying individuals. The circumstances that could trigger a penalty exception include:

You leave your job, whether voluntarily or involuntarily, after the age of 55
Your medical expenses exceed 7 ½% of your adjusted gross income
A court orders the money given to a divorced spouse or to a dependent
You leave work and set up a special withdrawal plan intended to last the rest of your lifetime
You become disabled

As you can see, it gets a bit complicated. The IRS does provide some written guidelines that further explain how 401(k) funds can be distributed and what are the exceptions to the usual fees. Click here to check them out.

6. What If I Don't Withdraw All My 401(k)?

You needn't pull all the funds out of your plan, but if you leave money in the account and you still intend to continue to contribute to it, there's often a waiting period before you can resume your contributions. Typically, a plan will pause contributions to the 401(k) for six months after a hardship withdrawal.
With this advice in mind, it might also be a good idea to take your early-401(k)-withdrawal plan to a qualified tax accountant or a tax lawyer -- someone who can help unpack all of the details of your particular plan.
One reason to do so is that you'll also want to understand how the income change -- the one that the IRS will evaluate on your next yearly return -- impacts your tax bracket. That is, if you withdraw enough from a 401(k) to get bumped to the next income level, what you're used to paying in taxes could suddenly jump quite a lot more.
And, as Bills.net points out, even a small error in filing a return under your new 401(k) withdrawal circumstances can go undetected for years. Then, if the IRS finds it and catches up with the discrepancy, the amount owed can be subject to further fees and interest.

What Medicare Covers: Health Coverage For When You Retire

Health insurance is one of the many things people must consider as they approach their retirement. Fortunately, there is a health insurance program administered by the United States government that was designed to provide coverage for individuals aged 65 and over known as Medicare. For those who are preparing to enroll for their first year of Medicare coverage, the task of choosing the right plan might seem a bit complicated. Here is a guide to help you understand what Medicare covers to help you choose the appropriate coverage plan.

What Medicare Covers

To find out what Medicare covers, you need to understand the various benefit options available. Medicare is split into four different parts, each offering coverage for specific services:

Medicare Part A: Medicare Part A covers the hospital insurance portion of your health insurance coverage. This includes inpatient hospital care, nursing facilities, hospice and home health care. In most cases, Part A premium fees are waived, as long as the individual paid Medicare taxes while working.

Medicare Part B: Medicare Part B covers any medical services deemed necessary, like visits to your doctor, outpatient care and various medical services. Part B coverage also includes preventative care to prevent or detect specific illnesses, like the flu.

Medicare Part C: Medicare Part C is also referred to as the Medicare Advantage Plan. The Medicare Advantage Plan functions like an HMO or PPO insurance plan, where coverage is provided by private health insurance companies that have been approved by Medicare. Some examples of Medicare Part C providers are Aetna Medicare, Kaiser Medicare and Humana Medicare. Medicare Part C includes the same coverage for both Part A and Part B plans for Medicare. However, Medicare Advantage Plans also offer additional coverage that can include dental, vision, hearing, and health and wellness programs. Many Part C coverage plans also include Medicare prescription drug coverage, which is the Part D portion of Medicare.

Medicare Part D: Medicare Part D covers prescription drugs for those enrolled in Medicare. This option helps cover the cost of prescription drugs, may help lower what you pay for prescription drugs, and can protect you against rising costs of prescription drugs in the future. To receive the benefits of Medicare Part D, you must join a prescription drug plan from an insurance company or other private company that has been approved by Medicare.

Medicare Eligibility

Before you can enroll for Medicare health coverage, you must meet certain eligibility requirements. Here is a quick guideline to help you determine whether or not you are eligible for Medicare:

You are age 65 or older.
You or your spouse worked a minimum of 10 years in Medicare-covered employment.
You are a citizen or permanent resident of the United States.
You are eligible for Social Security or Railroad benefits or are already receiving them.

If you don't fall within the specific guidelines above, it is still possible to enroll for Medicare if you meet one of the following criteria:

Are under 65 with certain disabilities
A person of any age who is suffering from end-Stage Renal Disease

If you are unsure about your eligibility for Medicare, you can visit Medicare.gov or call Social Security at 1-800-772-1213, or you can visit or call your local Social Security office.

Medicare Plans

There are two main Medicare plans that most people enroll in: Original Medicare and Medicare Advantage Plan.

Original Medicare: When enrolling for this plan, you must determine whether you wish to enroll in Part A, Part B or both. You will also need to determine if you want to enroll in Medicare Part D for prescription medication. Your final option is to enroll in Medigap, which is supplemental coverage that will fill any gaps in Original Medicare coverage. This coverage is directly provided by Medicare, and most people only need to pay a monthly premium for Part B coverage, since Part A fees are typically waived for those who have paid Medicare taxes while working.

Medicare Advantage Plan (Part C): Like it was mentioned earlier, this is a combination of Medicare Part A and Part B, with some insurance companies offering options for Part D. Like other PPO or HMO plans, you must use doctors, hospitals and health providers that are within the plan, or you end up paying most or all of the costs. You must also pay a monthly premium on top of your Part B premium along with copayments or coinsurance for certain services.
At a glance, Original Medicare might seem more appealing than a Medicare Advantage Plan due to lower costs and fees. However, keep in mind that Medicare Advantage Plans also come with additional benefits like dental, vision and hearing, which many people might be interested in. Factors like monthly premiums, deductibles, copayments and network providers will help you determine what Medicare plan is best suited for your needs.
Now that you have been familiarized with what Medicare covers, visit Medicare.gov for further information on enrollment, understanding claims, savings programs and other frequently asked questions regarding Medicare.

Things You Didn’t Know About Rolling Over A 401k

One of the many benefits that most companies offer is a 401k plan for your retirement. However, if you ever leave the company, whether it's on your own terms or not, you must decide what you wish to do with your 401k assets. If you are under the age of 59 1/2, you may suffer a penalty from withdrawing from your 401k too early. Taking a cash distribution of your 401k also means you are losing the opportunity to grow your investments on a tax deferred basis and that state and local taxes may apply to any money you receive. To avoid penalties and to continue to allow their retirement assets to remain tax deferred, many people consider rolling over their 401k plan to a new employer's plan or into an IRA.

Rolling Over Into a New Employer's 401k Plan

Once you start working for a new employer that has a 401k plan as part of your company benefits, make sure to ask whether they accept rollovers from a previous employer's plan. If they do, you can transfer the funds directly from your previous 401k plan to your new one. This will allow your retirement assets to continue to grow without suffering any income taxes or a 20 percent withholding tax.
If your previous employer made any matching or profit sharing contributions to your 401k plan, make sure you determine what percentage of these earnings you are allowed to keep. While you are usually 100 percent vested in contributions made directly from your paycheck, any rollover funds from previous plans and any earnings thereon, your years of service with the company may be used to calculate what percentage of the employer's contributions you are entitled to.

Rolling Over a 401k Into an IRA

An IRA, or Individual Retirement Account, is a savings account that benefits from similar tax breaks as a 401k plan. IRAs are recommended for those who do not have the benefit of a company sponsored 401k plan, like self-employed individuals or contract workers. If your new employer does not allow rollovers from previous 401k plans, an IRA would be your next option. Many financial advisors will inform you that the greatest advantage to an IRA over a 401k is a wide array of investment choices.
If you are eligible (if your annual income falls under a certain amount), consider rolling over your previous 401k into a Roth IRA, and starting a new 401k with your new employer. While you may no longer be eligible for tax deductions on a traditional IRA if you also have a 401k, a Roth 401k has its own advantages, like less withdrawal restrictions or requirements. Having both a Roth IRA and a 401k would allow you to receive matching contributions from your employer's 401k plan, tax diversity and the benefit of more investment options from a Roth IRA.

More Things You Need to Know About Rolling Over a 401k

If you accepted a cash distribution from your previous employer's 401k plan in a lump-sum, and suffered the mandatory 20 percent withholding, you can still recover the money lost. To do this, you would need to invest your cash distribution into an IRA, plus 20 percent of your own money to cover the amount that was withheld. This will allow you to receive credit for the money that was originally withheld when you file your income tax return.
You don't necessarily have to rollover your 401k plan when leaving an employer. You may still be able to keep the money in your former employer's plan, allowing your assets to remain tax deferred. However, not all employers offer this option, and certain rules and restrictions may apply.
Determine the fees for rolling over a 401k into an IRA. In some cases, it may be a wiser strategy to go with your new employer's 401k rather than a high-priced IRA.
To avoid the hassle of transfer penalties and the 20 percent withholding, make sure your previous employer transfers the money directly to an IRA or your new 401k plan rather than giving you the money directly.
Some employers require you to be employed for a certain period of time before offering the benefits of a 401k plan. If 401k eligibility were to require at least one year of employment, you may want to consider rolling over your previous 401k into an IRA instead.

Bottom Line

In the end, you may want to strongly consider rolling over your 401k from a previous employer into an IRA account. The largest benefit of an IRA account is how you can invest your money. With an IRA, you typically have more control and more investment choices than a 401k account. Whether you wish to rollover into a new employer's 401k plan, or an IRA, just know that you have options for your previous 401k aside from withdrawing the money and suffering any penalties.

Everything You Need To Know About Wills And Estate Planning

Planning what will happen to your financial assets after you pass away is an activity that most people dread. However, prudent estate planning is something that everyone should consider to prevent disputes and confusion after they die. While estate planning can seem overwhelmingly complex, there are only a few legal documents that you need to put in place in order to successfully create an estate plan that will carry out your financial goals after you move on.

Creating A Will

What It Is

A will is a legal document that explicitly stipulates what will happen to your assets after you die. It also allows you to select a guardian for your dependent children should you pass away before they become legal adults. Wills can be amended at any time. Therefore, it is wise to periodically review your will and amend it as necessary. Common reasons for amendment include marriage, divorce and the birth of a child.

Why You Need One

Everyone should create a will regardless of your income and personal wealth. Wills are especially important if you are married or if you have children. A will is the only way you can make sure that your assets will be distributed in accordance with your wishes. For example, if you want your assets to be equally split among your three children, you can stipulate that in your will.
On the other hand, if you want all of your money to go to your favorite charity, a will can make sure that your family does not interfere with your wish. Without a will, state law decides how your assets will be distributed. Therefore, dying without a will can cause conflict among your remaining family members if they engage in legal battles over the distribution of your assets. It can also enable the government to tax significant portions of your assets before they are distributed to your family.
In addition to specifying how your assets will be distributed, a will also allows you to select a guardian for your dependent children in the event that both you and your spouse die unexpectedly. Do not assume that a verbal agreement with a family member or friend will allow them to become your children’s guardian in the event that you and your spouse die. Unless your will explicitly names a guardian for your children, the state you live in will decide who will raise them in the event of your death.

How To Get One

There are two easy ways to create a will. The first is to hire an attorney to create one. This can cost up to $1000. Alternatively, you can create a will online for much cheaper. This will allow you to save on attorney fees. Websites like LegalZoom.com can help you to write and enact your will for less than $100.

Living Will

What It Is

In addition to setting up a will, you might also want to consider setting up a living will. A living will is a legal document that lays out what kind of medical treatment you wish to receive in the event that you become incapacitated and cannot personally express your preferences. This will help to ensure that your wishes will be followed by your doctors. It also protects your family from having to making tough decisions about keeping you on life support. You can also name a healthcare agent in your living will. Doing so will allow your agent to make medical decisions on your behalf if you are unable to communicate. If you do this, make sure to select someone that you trust as he or she will be responsible for carrying out your wishes.

Why You Need One

If you are severely injured and fall into a coma or if you become severely ill and cannot communicate, a living will can inform your doctors if you wish to be kept alive on life support. In the absence of this will, your family or your doctor might make a decision that is against your wishes.

How To Get One

You can create a living will by hiring an attorney or by doing it yourself online. For those who want to save money, the online option can be done for less than $100.

Assignment Of Power Of Attorney

What It Is

A legal document that allows you to select someone that you trust to manage your financial affairs in the event that you become incapacitated and can no longer handle them. A power of attorney allows your agent to pay your bills, manage your investments, and make all of your financial decisions. There are two types of power of attorney. One is the springing power of attorney which only goes into effect under specific circumstances that you specify. This often requires that your agent prove to a court that you are incapacitated before he or she is granted the power of attorney. The second type is called the durable power of attorney and it goes into effect immediately.

Why You Need To Do It

If you become incapacitated, you will need someone to manage your finances. Assigning power of attorney to someone you trust will help you avoid financial ruin in the event that you can no longer control your personal finances. If you become incapacitated without a power of attorney, a court can appoint someone to make decisions for you.

How To Do It

You can create a power of attorney by hiring an attorney or by doing it yourself online. For those who want to save money, the online option can be done for less than $50.

Trusts

What It Is

A trust is a legal mechanism that allows you to stipulate what happens to certain owned assets after you die. Because only certain assets can be placed in a trust, it is not as comprehensive as a will. Therefore, many people who create trusts also have a will as well. Assets placed in a trust can include life insurance policies, real estate, art and other financial assets.

Why You Need To Do It

Trusts are typically created to reduce the taxes that must be paid on your financial assets after you die. The government will heavily tax the money and other assets that you leave to the beneficiaries of your will. Therefore, if you want to maximize the value of your assets for your beneficiaries, you might consider setting up a trust. Trusts also allow people to put conditions on when and how their assets are distributed. Assets held in a trust are also often safe from creditors and lawsuits.

How To Set One Up

Because they are complicated and can be tailored to your specific situation, you should hire an estate planning attorney to set up a trust. A basic trust can cost $3000 or more depending on its complexity. However, the creation of a will and living will is often included in this cost.
While estate planning is an activity that is almost never relished, it is necessary to make sure that your finances and your family are taken care of after your death. It also ensures that your preferences are followed by your lawyers and your doctors in the event that you become indefinitely incapacitated.

Your Essential Estate Planning Checklist

Prudent estate planning involves several key steps that are designed to safeguard your beneficiaries financially in the event of your death. Therefore, it’s generally recommended that you create an estate plan if you have substantial assets, you want to provide for your dependents or if you have specific wishes regarding the disposition of your property or your future health care. You can create an estate plan on your own or with the assistance of an experienced estate planning attorney. When drafting your estate plan, you should consider the following five components in order to ensure that the interests of you and your beneficiaries are protected.

Establishing A Will

A last will and testament allows you to specify how you want your property or other assets to be distributed after you die. A will is the most basic document you should include in your estate plan if you want to ensure that your assets are divided according to your wishes. If you die intestate, meaning without a will, your estate will be distributed to your heirs according to state inheritance guidelines.
Each state has different rules regarding how a will is established but generally, you must be age 18 or older and of sound mind to write a will. Some states recognize oral or videotaped wills, but it’s generally a good idea to put your will in writing and have it witnessed by at least two other people. You may also want to have your will notarized and file a copy with your local probate court.

Do You Need A Trust?

A trust is a legal entity that can be established in conjunction with or independently of a will. A trust allows you to transfer control of specific assets to a trustee who is responsible for managing these assets according to your wishes. You can instruct the trustee as to how your finances should be handled after your death or in the event that you become permanently incapacitated.
Generally, a trust is recommended for those individuals who have substantial assets, own a business or want to plan for the financial well-being of a spouse and/or minor children. For example, you can use a trust to specify the conditions under which your children will be eligible to receive their inheritance or name someone to act as a financial conservator on their behalf until they reach adulthood. You can also use a trust to make charitable donations or to protect your assets from creditors.

Health Care Planning

Estate planning is not limited to financial considerations. You should also consider including an advance directive in your estate plan if you have specific wishes regarding your future medical care. An advance directive consists of two specific elements. First, you can establish a legal document naming someone to act as your health care agent. Your health care agent is responsible for making decisions about your care in situations where you are temporarily unable to do so. For example, if you’re going in for routine surgery and will be under anesthesia, your health care agent would have the authority to act in the event that emergency medical care is necessary.
The second component of an advance directive is a living will which specifies your wishes regarding your care if you are terminally ill or become permanently incapacitated. For example, you can specify whether you want to be kept alive using artificial methods such as a respirator or feeding tube or whether you want to donate your organs after your death.

Life Insurance

Life insurance is designed to help your loved ones cover your funeral expenses, pay off any remaining debts and cover the cost of living expenses should you die. If you have a mortgage loan, student loans or other debts or you are the primary income-earner for your family, purchasing a life insurance policy can help them to avoid an undue financial burden.
There are several types of life insurance you can purchase including whole life, universal life and term life. Whole life insurance builds some cash value while universal life is a type of permanent life insurance. Term life pays a fixed death benefit but expires after a specified amount of time, typically 10 to 20 years. The type of insurance you need generally depends on your income, debts, age and overall health.

Tax Planning

Depending on the size of your estate, you may also need to consider the potential tax implications involved. While federal estate taxes only apply in a small percentage of cases, this type of penalty can potentially cost your beneficiaries hundreds of thousands of dollars if you don’t take steps to minimize your tax liability. For example, you may consider gifting your property away during your lifetime in order to avoid a tax penalty. As of 2012, you could gift up to $13,000 to any one beneficiary without having to pay a gift tax. This exclusion is doubled up to $26,000 for couples. You can also reduce your tax liability by establishing certain types of trusts, such as a charitable trust or an AB trust, which allows you to leave assets to your children in care of your spouse without subjecting them to additional estate tax.
Creating an estate plan not only protects your assets and your beneficiaries. It can also provide you with financial peace of mind. While you may not want to think about planning for the inevitable, it’s not something you or your loved ones can afford to put off.

4 Retirement Planning Tools For The Self-Employed

One of the biggest mistakes entrepreneurs make is that they’re so focused on their businesses that they neglect themselves. Nearly all of them work way too many hours. Some pay themselves less than they should. And many stock away nothing -- or practically nothing -- for retirement.

When it comes to retirement, the best tip for the self employed is not to forget about it. The self-employed, many of whom don’t know what they will earn from month to month, need to set aside money every month for their retirement.
Here are the four best retirement planning tools for the self-employed.

The Individual 401(k) Plan

Also known as a solo 401(k), this plan works a lot like the 401(k) plans offered at mid-sized or large companies. Self-employed workers can choose a traditional plan or a Roth plan. Keep in mind that only business owners and their spouses are eligible for an individual 401(k). The annual contribution limit for 2012 is $17,000 with the option of a profit-sharing add-on that is 25 percent of your compensation or $50,000, whichever is less. Most mutual fund and investment management companies offer these plans.
Pros: This plan is flexible and entrepreneurs can contribute more than with the SIMPLE IRA and the SEP IRA. Additionally, business owners who save using this tool can borrow from it.
Cons: The solo 401(k) costs more than the other options (between $25 and $250 per year) and they can be more difficult to open and administer. Costs vary greatly, so you need to shop around.
Bottom Line: This plan is best for an entrepreneur who is aggressive about saving for retirement. Keep in mind that opening and operating the plan can be difficult.

The SEP IRA

The Simplified Employee Pension IRA is a pension plan funded by the employer. Annual contributions that an employer makes to an employee’s SEP-IRA cannot exceed 25 percent of total compensation or $50,000, whichever is less. Any employer, regardless of its size, is eligible for this plan.
Pros: The SEP IRA is easy and inexpensive to start and administer (no more than $50 a year). It also has higher contribution limits than the SIMPLE IRA and contribution amounts can vary each year which allows for more flexibility. The SEP can be opened as late as Oct. 15 for sole proprietors and requires no annual government reports.
Cons: The employer has all the responsibility of funding the SEP, so if you have employees, you must contribute the same percentage of compensation for them as you do for yourself. Most people can save more with an individual 401(k). What’s more, the SEP doesn’t allow for catch-up contributions and you can’t take out a loan from this plan.
Bottom Line: The SEP probably is best for a business with one or very few employees because the employer must fund the plan. It is a good plan for those who are serious about saving but want flexibility and an easy plan to administer.

The SIMPLE IRA

The Savings Incentive Match Plan for Employees is a tax-deferred retirement savings plan for small businesses. Like the SEP IRA, the employer must contribute to this plan. And employees can also contribute if they choose to do so. The employer must either match employee salary contributions up to 3 percent or contribute 2 percent of the pay for all eligible employees -- even those who don’t put in money for themselves. Employees can contribute as much as $11,500 and $14,000 if they are age 50 or older.
If you are the only employee in the company you own, you can contribute as much as $11,500 or all of your income, whichever is less, as well as 2 percent or 3 percent of your income. Only employers with fewer than 100 employees and no other retirement plans are eligible.
Pros: Like the SEP, the plan is inexpensive and easy to open and run (about $25 per year). It requires no annual government reports.
Cons: Contribution limits are lower than other retirement plans, and the SIMPLE IRA does not allow you to borrow against your account as you can with the individual 401(k) plan.
Bottom Line: The SIMPLE IRA is best for very small businesses that don’t want to contribute a lot to their retirement plans, and don’t want the option of borrowing from the plan. Contributions are mandatory, so the business owner must know that he or she can make contributions.

The Defined Benefit Plan

This plan is similar to a traditional pension plan and any employer is eligible. Contributions to a defined benefit plan are determined by a complicated formula which often results in much higher contribution limits than with other retirement plans. Usually employers contribute, but sometimes employees contribute as well.
Pros: The defined benefit plan allows employers to save much more money than the three other plans and participants can borrow from their accounts.
Cons: Contributions to the plan are mandatory and the plan is the most expensive and complicated, partially accounting for a decline of about 114,000 plans in 1985 to 38,000 or so today. An excise tax applies if the minimum contribution requirement is not satisfied.
Bottom Line: The plan is best for high-income business owners who want to put away a lot of money and have the staffs to set up and administer it.
If you are self-employed or you own your own business, you should carefully consider the pros and cons of each of these retirement tools before making a final decision on how to set up retirement plans for you and your employees.

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Annuities 101

Variable Annuities

Fixed Annuities

Indexed Annuities

How Your Benefits Are Affected By When You Start Collecting Them

Weighing Your Options

Start Saving Early

Save More

Don’t Underestimate Your Future Expenses

Don’t Invest Too Conservatively

Diversify

Key Differences Between A Traditional And A Roth 401k

Your Contributions Are Taxed At Different Times

Annual Required Minimum Distributions?

Similarities Between The Two 401k Retirement Plans

Which Plan Should You Pick?

What Is A 403(b)?

How Is A 403(b) Different From A 401(k)?

What Are The Annual Contribution Limits?

What Are The Investment Options?

When Can Funds Be Withdrawn From A 403(b)?

Loans Against A 403(b) Account

What Happens If You Get A New Job?

What About The Roth 403(b)?

What Is AARP?

What Are The Key Benefits Associated With Joining AARP?

The Heath Care And Dental Benefits Of AARP Membership

Cautionary Note

Decide How Much To Invest

Find Room In Your Budget To Invest

Choose A Roth 401(K) Or A Traditional 401(K)

Determine Your Risk Appetite

Determine How Much You Will Need Each Month

Become Debt Free

Save A Considerable Amount Of Your Monthly Income

Invest Wisely

Consider Part-Time Income

Are You Designated As The Beneficiary?

Are You The Spouse Of The Original IRA Owner?

If You Are Not The Spouse

Re-Title The IRA

Make Sure You Take The Minimum Distributions

Traditional IRA Basics

Roth IRA Basics

Traditional Vs. Roth IRAs

Tax Deferral

Age Limits

Income Caps

Tax Deductibility

Required Minimum Distribution (RMD)

Early Disbursement

Deciding Which Account Is Best for You

Splitting Your Contributions

What Is An IRA?

How IRAs Work

Deposits and Withdrawals

The Benefits Of An IRA

It's Not Free To Open And Maintain An IRA

Tax Planning

1. How Early is "Early"?

2. Can Anyone Withdraw Early?

3. What are the Fees?

4. Taxes on Early 401(k) Withdrawal

5. Are There Any Fee Exceptions?

6. What If I Don't Withdraw All My 401(k)?

What Medicare Covers

Medicare Eligibility

Medicare Plans

Rolling Over Into a New Employer's 401k Plan

Rolling Over a 401k Into an IRA

More Things You Need to Know About Rolling Over a 401k

Bottom Line

Creating A Will

What It Is

Why You Need One

How To Get One

Living Will

What It Is