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Retirement plans all have one thing in common; they all allow you to set money aside in an approved plan that will not be taxed for income tax purposes until it is withdrawn. Theoretically in retirement. It is however, taxed as you earn it, for Social Security and Medicare. There are several types, and even more kinds of plans.

The most common is called the “Traditional IRA” (Individual Retirement Arrangement). In recent years a second kind of IRA account has been enacted, the “Roth IRA”. These two retirement plans are created, funded and controlled by the individual worker. Note we said ‘worker’ as you must have either earned income or receive alimony payments to qualify for deductible contributions. As with all qualifying retirement plans, the Federal Government has placed restrictions on who qualifies and who does not.

The next types of retirement plans are company sponsored and are divided into two kinds; “Defined Benefit” and “Defined Contribution”. We will provide a brief description of the more commonly used plans and display several spreadsheets that compare the different plans. We will, as we always do, give you some of the ‘look fors and lookout fors’ when selecting investments within the plans. Lastly we will discuss the rules for early withdrawal, early retirement, regular retirement and finally mandatory retirement.

Traditional IRA

To qualify for a deductible IRA, you must as we said, have compensation. It is possible to make nondeductible Traditional IRA contributions, which we don’t recommend, if you have already done so, please keep those dollars separate from any qualifying money; the accounting quickly becomes a nightmare.

If you are working and would like to start contributing to an IRA, and have another retirement plan at work (or had one during the calendar year), you should review the income restrictions table below. If you qualify, you may in 2006 place up to $4,000 for yourself and $4,000 for your spouse into an IRA and take a deduction for that amount on your tax return for the 2006 tax year.

Where can you go to establish an IRA? Most banks, credit unions, insurance companies and brokerage firms are qualifying institutions and would be more than pleased to help. The services and choices they offer will vary. Banks and credit unions will probably first offer one of their CDs, but may also have a choice of a few mutual funds. Insurance companies will offer an annuity, but with them, be very clear on fees, commissions, and most importantly early withdrawal penalties. The worst I have ever seen was an annuity in a 403(b) plan that had an 18 year penalty period and a 20% penalty for a good part of that time. Need we say more! A brokerage firm will be able to offer all the investments already listed plus the opportunity to invest in individual stocks, ETFs, and bonds, but do be annual fee aware, and commission conscience. Most charge a fee of $30 - $50 a year which is expensive for a new and small IRA amount. If you know of a particular Mutual Fund Family, consider a direct contact with them, they can be very cost effective. There are also no-load funds and the internet, but once again those hidden charges may abound.

Roth IRA

The Roth IRA is a product that allows you to invest after tax money into a retirement plan but without the tax deduction. In other words, you put money into the plan and still pay income tax on that amount, but it does grow tax free, and at retirement it comes out tax free. One advantage is that it does not have to come out at all; it can be left in that sheltered status to be inherited by the kids with no income tax. It is often used this way, as people convert from a traditional IRA to a Roth and pay the tax do, so it can go tax free to the kids. We are pretty careful about this move as we don’t always think it is the best way to go. You can always get the dollars you contributed back out without penalty but gains would be subject to penalties.

Now follows the rules and regulations for putting money into the Traditional IRA and Roth.

Contributions must be made by check or money order.

Individual traditional IRA contributions are not allowed for the year in which you turn 70 ½ and beyond.

A traditional IRA must be established and funded by the due date of the return, normally April 15. You cannot use a tax extension to extend the deadline.

If you are not an active plan participant and neither is your spouse, your contributions would be fully deductible to the limits regardless of income.

Limits Traditional

2006 - $4,000 or $4,500 if over age 50. You must have at least those amounts in compensation and be under certain income limits if one of you has another retirement plan to make a deductible contribution.

The income limits start when you have a Modified AGI of $70,000 Joint and at $80,000 you go to zero allowable. Single starts at $50,000 and ends at $60,000.

Limits Roth

Retirement Plans
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