Government Gives Retirement Funds Room to Recover

A new law may make it easier for some Americans to allow their retirement funds to recoup losses. That’s because mandatory withdrawals from certain retirement accounts have been waived for tax year 2009.

Usually, anyone age 70 1/2 or older is required to withdraw funds from their retirement plans each year, even if the money isn’t needed. These plans include 401(k)s, 403(b)s, some 457(b)s as well as IRAs and IRA-based plans such as Simple IRAs and SEPs. However, The Worker, Retiree and Employer Recovery Act of 2008 waives the requirement to withdraw funds in 2009. To learn more, visit www.irs.gov/pub/irs-drop/n-09-09.pdf.

[Government Gives Retirement Funds Room to Recover] IRS.gov

Financial Priority #3: Saving for Your Retirement

Of course, retirement seems a long way off for someone just starting out in their career, but creating a long-term retirement savings strategy and then actually starting it is one of the smartest decisions you can make as a young person. After making sure you've got health insurance coverage and setting up a strategy to pay off high-interest debt, planning for your retirement is an essential step towards a secure retirement.

Compound interest on money you save in an Individual Retirement Account (IRA) or other kind of retirement savings vehicle will similar grow over time at an impressive pace. Take advantage of that compound growth by investing in your 20s rather than waiting until you’re closer to retirement and have less time for your money to grow!

So, what can you do now to be secure later?

• If your employer sponsors a retirement plan, and especially if your employer will match any contribution you make to the fund, that is absolutely your best option. Not signing up for a plan that includes employer contributions is like leaving money on the table!
  

• If the employer-sponsored option is not available to you, you can start a Roth IRA for yourself with a relatively small amount of savings. For example, it’s possible to open an account with a leading investment firm if you have $1000, but you will be charged a $10 annual fee. When your account balance reaches $5000 the annual fee disappears so it may make sense for you to save your money in a bank account (with no annual fee) until you reach the $5000 threshold. Or, if you would be too tempted to make withdrawals from a personal savings account, go ahead and start a Roth IRA with less than $5000 and the $10 annual fee will be an an incentive to contribute as much as you can afford.
  

• As was discussed is an earlier post, Roth IRAs are the best fit if you are currently in a low tax bracket but expect, or hope, to be in a higher-earning tax bracket by the time you are ready to retire. This is because Roth IRAs, as opposed to traditional IRAs, are set up such that you contribute after-tax income to the account (meaning, the amount of money you chose to contribute to a Roth IRA is not tax-exempt) but then don’t pay any taxes on the money you withdraw when you reach age 59½. Since taxes are generally expected to rise over time, this scheme essentially allows to you spend more of the retirement money you save on yourself rather than to pay taxes.

• Roth IRAs are also a valuable resource for young people because they allow you to start saving for your old age, but you don’t necessarily have to wait until your old age to use some of that money. For example, starting five years after you opened the account, you’re allowed to withdraw contributions from your Roth IRA (note: you can’t take out interest earned, only the money you originally deposited) to pay for expenses like certain necessary medical costs, to buy your first home, and to pay for higher education.
  

Follow this three part guide to economic security and get your financial priorities straight: first, your health; next, pay off debt so you can start to save; and finally, start saving for retirement in your 20s so you can reap the benefits of investing early! Look for more helpful financial advice for women of all ages from WISER in the future!

Spare Change: Quick Info from WISER

Today's Spare Change:

• Definition of the Day: Roth IRA
• A Money Myth Worth Disproving

• What is a Roth IRA?

• The Roth IRA is different from the traditional IRA in two ways: It provides tax benefits when you take the money out at retirement rather than when you invest it and it has higher income limits.With Roth IRAs, you cannot deduct the amount of your contribution on your tax return. However, you will not pay taxes when you withdraw your funds. There are no income limits if you are not covered by a pension plan at work. You can withdraw contributions and earnings at age 59½ with no federal tax or penalty, provided you opened your account at least 5 years prior. If you are less than 59½, you can make tax-free and penalty-free withdrawals 5 years after opening your account for certain medical expenses, higher education expenses or to buy your first home

• Money Myth: The majority of women are now part of the paid labor force so they will be better off in retirement than current women retirees.

• Fact:Elderly women are twice as likely to live in poverty as men and experts do not predict much change in the future because:women earn less money than men and have less to save; caregiving responsibilities make women more likely to leave jobs or work part-time and forfeit pension benefits as a result, and women are more likely to work in occupational sectors, such as the service industry, where pension benefits are less common.

To overcome these challenges, women need to: make a retirement savings plan early in life and stick to it; stay at jobs long enough to earn retirement benefits; and seek out jobs with better benefits when possible.