HACE 3200 1nd Edition Lecture 29Outline of Last Lecture I. Retirement PlanningII. Social Security III. Pension PlansOutline of Current Lecture4. Employee Stock Ownership Plano Employer contributions are made in the form of company stocko This form of plan is the riskiest because your retirement is dependent on the performance of the companyo This type of plan does not allow for diversification- B. 401(K) planso In 1978, congress decided that Americans needed a bit of encouragement to savemore 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, theymight 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 SEPso 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 planso The money coming out of paycheck goes before taxes are calculatedo 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 accountso You tell your employer how much money you want to go into the account- Maximum contributiono In 2014: $17,500- Plans for the small business and self-employedo Keogh plano Simplified employee Pension Plan- Keogh plansThese 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 planso annual contribution of a fixed percentage of business profito or what ever amount you deem necessary to meet your retirement needs- Simplified Employee Pension Plano Similar to a defined-contribution Keogh plan, but easier to establisho Used by small business owners with no or few employeeso Contributions are tax-deductible and earnings are tax-deferred - Personal Savings Contributionso 3. Individual Retirement Accounts Traditional IRA Roth IRA Education IRA- Traditional IRAo Contributions grow tax-deferred until withdrawal You pay taxes when you draw on the accounto Allows nonworking spouses to make a contributiono Self-directed, but cannot invest in life insurance or collectible, except gold or silver U.S. coinso Distributions prior to age 59 ½ 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 IRAo The Roth IRA was born on January 1, 1998 as a result of the Taxpayer Relief Act of1997o The Roth IRA provides no deduction for contributions, but instead provides benefit that isn’t available for traditional retirement accounts: if you meet certainrequirements, all earnings are tax free when you or your beneficiary withdraw themo Other benefits: early distribution penalty on certain withdrawal, and eliminating the need to take minimum distributions after age 70 ½- Roth IRAso Contributions are not tax deductible You pay taxes up fronto 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 requirementso First you and your spouse must have qualifying income at least equal to amount contributedo Second, your modified adjusted gross income cant exceed certain limits- Education IRAo Now known as: Coverdell Education Savings Accountso Just like a Roth IRAo Except contributions are limited to $2000 per year/childo Earnings are tax-freeo No tax on withdrawal used for education- Plan now, retire latero 1. Set goalso 2. Estimate how much you’ll need to meet your goalso 3. Estimate your income available at retiremento 4. Calculate the annual inflation adjusted shortfallo 5. Calculate the funds needed at retirement to cover this shortfall over your entire retiremento 6. Determine how much you must save annually between now and retiremento 7. Put the plan into play and save- Legs 2 and 3 of the stool: Calculate using our formulaso Future value o Present valueo Future value of Annuityo Present value of