HACE 3200 1nd Edition Lecture 29 Outline of Last Lecture I Retirement Planning II Social Security III Pension Plans Outline of Current Lecture 4 Employee Stock Ownership Plan o Employer contributions are made in the form of company stock o This form of plan is the riskiest because your retirement is dependent on the performance of the company o This type of plan does not allow for diversification B 401 K plans o In 1978 congress decided that Americans needed a bit of encouragement to save more money for retirement They thought that if they gave people a way to save for retirement while at the same time lowering their state and federal taxes they might just take advantage of it o 401 k plans are part of a family of retirement plans known as defined contribution plans Other defined contribution plans include profit sharing plans IRAs and Simple IRAs and SEPs o They are called defined contribution plans because the amount that is contributed is defined either by the employee or the employer Four things differentiate a 401 k plan from other retirement plans o The money coming out of paycheck goes before taxes are calculated o Your employer may match a portion of your contribution o The money is given to a third party administrator who invests it in mutual bonds bonds money market accounts o You tell your employer how much money you want to go into the account Maximum contribution o In 2014 17 500 Plans for the small business and self employed o Keogh plan o Simplified employee Pension Plan Keogh plans These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Similar to corporate pensions or profit sharing plans o annual contribution of a fixed percentage of business profit o or what ever amount you deem necessary to meet your retirement needs Simplified Employee Pension Plan o Similar to a defined contribution Keogh plan but easier to establish o Used by small business owners with no or few employees o Contributions are tax deductible and earnings are tax deferred Personal Savings Contributions o 3 Individual Retirement Accounts Traditional IRA Roth IRA Education IRA Traditional IRA o Contributions grow tax deferred until withdrawal You pay taxes when you draw on the account o Allows nonworking spouses to make a contribution o Self directed but cannot invest in life insurance or collectible except gold or silver U S coins o Distributions prior to age 59 are subject to a 10 tax penalty with few exceptions For first home purchase up to 10 000 Are paying college expenses Become disabled Need for medical expenses or medical insurance premiums with restrictions Roth IRA o The Roth IRA was born on January 1 1998 as a result of the Taxpayer Relief Act of 1997 o The Roth IRA provides no deduction for contributions but instead provides benefit that isn t available for traditional retirement accounts if you meet certain requirements all earnings are tax free when you or your beneficiary withdraw them o Other benefits early distribution penalty on certain withdrawal and eliminating the need to take minimum distributions after age 70 Roth IRAs o Contributions are not tax deductible You pay taxes up front o Earnings grow tax free Withdrawals are tax free if the Roth IRA is held for 5 years 5000 contribution limit in 2010 6000 if over 50 There are just two requirements o First you and your spouse must have qualifying income at least equal to amount contributed o Second your modified adjusted gross income cant exceed certain limits Education IRA o Now known as Coverdell Education Savings Accounts o Just like a Roth IRA o Except contributions are limited to 2000 per year child o Earnings are tax free o No tax on withdrawal used for education Plan now retire later o 1 Set goals o 2 Estimate how much you ll need to meet your goals o 3 Estimate your income available at retirement o 4 Calculate the annual inflation adjusted shortfall o 5 Calculate the funds needed at retirement to cover this shortfall over your entire retirement o 6 Determine how much you must save annually between now and retirement o 7 Put the plan into play and save Legs 2 and 3 of the stool Calculate using our formulas o Future value o Present value o Future value of Annuity o Present value of Annuity