Individual Retirement Accounts - Part 2

The US government provides incentive for individuals to save for retirement by providing tax advantages when you invest in IRAs. However, the IRS strongly discourages withdrawal of IRA funds prior to retirement by providing tax penalties if you take the money out too soon.

Normally, withdrawals from an IRA (either a Traditional or Roth) are allowed without penalty once you reach 59-1/2. Also, Traditional IRA holders must start taking distributions of minimum amounts by April 1 of the year after they reach 70-1/2. Because of the tax nature of the Roth IRA, you are allowed to withdraw your contributions at any time, but will pay penalties if you withdraw any of the earnings. Penalties vary, depending on the situation.

There are a number of “exceptions” to the above rules where withdrawals will be exempt from penalties, including:

- Withdrawals to cover medical expenses that exceed certain limits or for medical insurance while unemployed.
- Withdrawals after you become disabled
- Amounts distributed to beneficiaries if you die
- Distributions that are an annuity or the form of an annuity
- For certain qualified higher education expenses of children or grandchildren
- Distributions to help you purchase, build or rebuild a first home
- Distributions made to the IRS in the case of a levy

The recent economic downturn has led Congress to revise some of the above rules for withdrawals from IRAs. Here is a link to a summary of the revised rules: http://finance.yahoo.com/retirement/article/106391/Congress-Revises-Retirement-Fund-Rules

Minimum Wage Increase in Illinois

A quick post - the minimum wage in Illinois is scheduled to increase to $8.00 per hour beginning July 1, 2009.

Here is a link to the Illinois Department of Labor website containing more information: http://www.state.il.us/Agency/idol/Facts/mw.htm

Every Little Bit Helps - Part II

On January 9, I had a post here about different ways to save a little bit… each day or each week. While these amounts don’t seem like much when looked at individually, you’d be surprised at how quickly the little things add up over a year’s time!

I ran across an article from Kiplinger’s titled, “Save $50 a Day (and Feel No Pain)”. The article starts off with, “See how much money you can put back in your pocket” and goes on to cover savings ideas in different topics:

- Banking & Loans
- Health & Insurance Costs
- Utilities
- Food
- Transportation
- Investing
- Leisure
- Must-Have Trends

There are some good ideas here – some relevant to you, others that are not. Looking through the ideas, the Santos household has tried at least ten of these over the past couple of years. I can attest that yes, if you stick to it, the savings are real! One caveat: the $50 per day savings in the title is a bit misleading, as you’d need to do everything suggested in the article to achieve those savings.

Here’s a link to the article: http://www.kiplinger.com/magazine/archives/2009/02/save-fifty-a-day-and-feel-no-pain.html

Individual Retirement Accounts - Part 1

The acronym IRA stands for an Individual Retirement Account. On dictionary.com, an IRA is, “an investment account in which a person can set aside up to a specified amount each year and usually deduct the contributions from taxable income, with the contributions and interest being tax-deferred until retirement.” This definition is for a Traditional IRA.

Alternatively, a recent development has been the Roth IRA. This type of IRA functions similarly to a Traditional IRA – with one main exception. Instead of contributions being tax deferred, you contribute to a Roth IRA with after-tax dollars. Again, according to dictionary.com, a Roth IRA is where you make contributions for retirement but “earnings on the account are tax-free, and tax-free withdrawals may be made after age 59-1/2.”

So, which type of IRA is better? To know for sure, you’d need a crystal ball – you know your income tax rates now, but can you project what they will be in the future at the time of withdrawal? In general, if you believe your income tax rate now is higher than it will be at retirement, than a Traditional IRA is probably best for you. Alternatively, if you believe your income tax rate now is lower than it will be at retirement, a Roth IRA is probably best. Tax treatment and eligibility for either type of IRA phase out at certain levels of income. So, as always, when making these types of decisions, seek the advice of an investment professional.

Saving for Retirement

When we retire, we really don’t want to work. So, what do we need to know in order to prepare for that blissful day? There are many factors that go into determining your retirement savings:

- Your age: Now, when you retire, and when you expire (how long will you live during retirement?). The earlier you start and the later you retire will produce the best result here.
- Your income: Now, and how much you’ll want during retirement. Of course, the higher it is now and the lower it is during retirement will produce the best result.
- How much you have saved for retirement already. The more the better.
- How much will your current salary grow between now and retirement? The higher the better.
- What return will you get on your investments? The higher the better.

You want to take the amount you have saved already, add to it annually and watch it grow until the day you retire. Then, that “pool” of money will continue to grow during your retirement, albeit more slowly since you will also now be withdrawing funds for your retirement.

A handy calculator that covers these (and some other) factors can be found in Yahoo! Personal Finance at: – this can be either an exciting or depressing exercise, depending on the assumptions you make.

As always, this is rough planning. If you feel like you need more detail, seek the help of a professional.

Shifting Gears

Since I’ve been busy with budgets, E-Rate filings, and year-end payroll tax filings, among other things, I haven’t had much time to devote to this blog. So, to keep information flowing to you, here is a plug for my co-workers here at ALS!

The Consulting & Continuing Education Department here at ALS has come up with a new downloadable. It is titled, “Shifting Gears: rethinking resources in tough times” and contains many ideas in the following topics:

- Budget rules of thumb

- Ways to save money

- How to make cuts

- Reality checks

- Surviving & thriving in tough times

This downloadable, along with many other useful resources, can be found at the C&CE Departments webpage here: http://www.alliancelibrarysystem.com/CEdownloadables.cfm