Skip to main content

Basics of Retirement Options

Here is some Basic information that I have been able to understand: To get/save money, there are 4 classes .... based on taxation
  1. Free: Inheritance
  2. Tax-Free: HSA, Roth IRA, Life Insurance, 529, Money Bonds.
  3. Tax-Deferred: IRA, 401k, 403b, 457b, Annuity
  4. Taxable: Income

Of course free is the best (inheritance). Tax-Free is better but Tax-deferred, which is the last best option! Income is always taxable. Income is a combination of wages, salaries, capital gains and business profit/loss on which Fed/State tax is calculated. To reduce income, you can contribute more to your retirement accounts on pre-tax basis. AGI (adjusted gross income) is income with some adjustments like HSA, educator expenses, student loan interest deductions, etc. MAGI is AGI with some deductions added back.

Most universities offer a combination of plans which may be Pension plans (like STRS), Contribution plans (401k, 403b) or others. Companies offer contribution plans like 401ks. You should also explore 529 and HSA options in your employment.

Here are some basics on different types of options:

  • 401(k): Pre-tax (deducted from your salary before tax and reduce overall income), tax-deferred (i.e., taxed at withdrawal), 59.5yr rule applies (10% penalty applies if withdrawn earlier than 59.5 years of age, some qualified withdrawals are allowed though), 70.5ys required withdrawal, max $19500/year contribution (the amount is updated by IRS every year) and $6500 of catch-up contributions for 50yr or older (i.e., can deposit extra)
  • IRA: Pre-tax, tax-deferred, 59.5yr rule applies (10% penalty), 70.5ys required withdrawal, max $6000/year contribution (updates every year), income limit $70k for singles or $116k if you're married filing jointly (income means MAGI).
  • Roth-IRA: Post-tax, tax-free (contributions grow tax free), 59.5yr rule applies (10% penalty unless its qualified withdrawal) along with 5yr rule (i.e., taxed if earnings withdrawn before 5yrs of first contribution), max $6000/year contribution (updated every year) with1k catch-up allowed, max income/MAGI limit $124k for singles and $196k if married filing jointly (reduced contributions allowed for those earning a bit higher than the limit). For withdrawal: Contributions can be withdrawn any time for any reason (but have to report on tax returns). Earnings can be withdrawn penalty free for qualified expenses (upto 10k, lifetime max limit) and Income tax free if first contribution was older than 5 years and older than 59.5yr old.
  • Roth-401(k): Post-tax 401k, tax-free, no income limit
  • 403(b): Its 401(k) version for government entities - those who don't offer 401k.
  • 457(b): Its 401(k) without the penalty
Here are some other saving options:
  • HSA (Health Saving Accounts) are available with high-deductible plans. They have triple tax benefits. They are pre-tax (i.e., deductible from taxable income) saving accounts where money can be saved as cash or can be invested (if more than minimum, which is usually $100). Invested money grows tax free and can be used on qualified medical expenses without any tax (penalty applies for other usage). If you don't have any major health issues in your family, consider them strongly.
  • 529 accounts are saving accounts (post-tax) for kids education which offer double tax benefits and some may offer tax advantages like state tax refunds. Money can be invested and grows tax free. Qualified withdrawals are also tax free. If your kids are young, open the account for each kid and start saving some money in there.
  • Broker Account can also be very useful as a substitute to quick-money. Tax is calculated when you sell stocks (not when you withdraw funds). Capital gains are taxed at individual income tax rate if short-term (held less than a year) or at 0%, 15%, 20% for long-term (if held long than a year) depending on your income level. Qualified dividends (paid by companies) are taxed at the capital gains tax rate and Unqualified dividends (like REIT) are taxed at the income tax rate.
Some Useful Information, Tips and Terminology:
  • Company usually offers either 401k or 403b. Difference may be the type of company or the fee charged! 401k/403b may be invested into stocks, bonds, etc.
  • Roth-IRA has income limit and Roth-401k doesn't, both have contribution limits. Roth-IRA can be passed to dependents and has more investment options
  • Contribution Limit applies to Roth-IRA and IRA combined.
  • 401k is not guaranteed while Pension plans are guaranteed.
  • 403(b) is protected from bankruptcy but IRA is not.
  • If your employer offers to contribute to your retirement accounts, you should make every effort to get that free money. For that, pick atleast the minimum possible pension/contribution amount that is required to get employer's contribution (sometimes its a simple salary match). After that get additional individual retirement plan s (IRA/Roth-IRA/401(k)/403(b)/457, etc).
  • Also strongly consider getting HSA, life insurance and 529 for kids education. 
  • One good strategy is to contribute enough to the retirement accounts like 401k to get all available matching dollars from employer. Then, max out your HSA, Roth-IRA, IRA (in any order you wish), and then max out your 401k.
  • Post-Tax plans might offer a better saving than pre-tax (if not similar). Consider this example:
    Case 1: If you make 150k salary and work for 15 years (with 5% increase, 5% to 401k and 50% match) then you will have 403,690 at retirement (assuming 8% ROR). If you retire in 30 years, after incorporating 3.1% inflation, 4% ROR, 25% tax, you will make $1404/month
    Case 2: If you have a private pension account where you deposit 1000/month for 15 years post-tax, you will be getting $1177/month tax free at retirement. 
  • Broker accounts can be used to buy equities (or stocks). Find one which doesn't charge too much fees. These fees may be broker fee (to open account or provide research data), transaction or trade fee, expense ratio (annual fee for some funds), sales load (fee for selling), management fee (for managing your money), etc. Robinhood is one option that doesn't charge any fee for purchases but does for sales. Other like Fidelity used to have fees too, now most are getting closer to being free. Some Useful Terms: 
    • Stock: Sold as shares (part of ownership for publicly traded companies) => typically for long term investing 
    • Bonds: Is a loan, Exp: Treasury: average maturity of 10 years and annual interest for 2% => These are for income generation thing hence only used when closer to retirement or when you need money, for short term! 
    • Short-term/Liquid: preserve money; 3-6 month emergency fund, or something to buy in next year or so. daily trading too
    • Investment Strategies: Conservative [6% (more closer to retirement, 1-8 years) => 50% short term/bonds, 50% stocks]; Balanced [7.93% (9-12 years or less)]; Growth [8.89% (More than 13 years) - more stable version of aggressive growth]; Aggressive Growth [9.5% (if you have stomach for risk) - i.e, between 90-60% stocks)]
Final Recommendations: 
  • Perhaps the best course of action is to establish and fund self-directed retirement plans, such as 401ks and 403bs if your employer offers them; or traditional or Roth IRAs if they don’t. Then plan your own savings. consider pension plans to be a bonus.
  • Use HSA (if you are able to choose high-deductible plan) and max it out. It has triple tax benefits 
  • Save in 529 and Get Life Insurance (outside your current employer which you can keep even if you switch jobs)
  • Key: Get employer contribution (and save some in employer retirement plan to reduce income), max out HSA, and then max out Roth-IRA and/or IRA; then save in 529. After that, keep cash for 3-6 months of expenses and finally put rest of the money in Broker Account. You may also want to invest somewhere else, like properties, international, etc. Don't put all eggs in one basket (i.e., in one country or in one type of stock). Evaluate your strategy every 1-2 years.

Related links:
http://www.valuepenguin.com/investing/investment-account-types
http://www.rothira.com/blog/factoring-pensions-into-your-retirement-plans
https://www.youtube.com/watch?v=p925UP6WxEE

Comments

Popular posts from this blog

FAQs about Admissions, US Visa Applications & Visa Renewal

Q: What are alternate Health Insurance options for F-1 International students? A: Graduate students are encouraged to buy student health insurance offered through UCF Student Health Services (Chickering Group). As of Summer 2008, UCF accepts the following alternate insurance plans for F-1 students: www.isoa.org (Plans: ISO Med1, ISO Med Prestige and Compass Gold) www.psiservice.com (Plans: Student Plan II and III) www.icsweb.org (Plans: Plan A, Plan Vantage) www.buyamericaninsurance.com (Plans: Study USA - Plan A and Plan B) Q: What do I need to do when I arrive at UCF? A: First of all you need to get rid of all of your holds (which you can find through my.ucf.edu). One of the holds will be related to your immigration status which can be removed after you report to ISC office (or orientation) and provide them with copies of your i94, visa, passport and i20. Another hold will be related to your health immunizations. If you haven't already provided proof of immunization, you will ha

My Experience with Academic Job Search / Salary Data

MY EXPERIENCE WITH ACADEMIC JOB SEARCH (WITH AN MS DEGREE) There are usually two avenues after MS (or even PhD). You can choose to go to industry or academia. I will focus on teaching as this is the route I took. As a candidate for instructor or teacher with MS/PhD degree you have primarily two options: Community Colleges or Universities. Here are few things to remember: Top Research universities will always want a candidate with finished PhD. Some occasionally will ask for ABDs but degree needs to be finished before you start working. These positions are mostly Tenure Track positions but sometimes Non-Tenure Track too. Other universities or colleges will prefer PhDs but may accept MS degrees for teaching positions (like lecturer or instructor). This also works for regional campuses of large universities too. Community colleges mostly want candidates with MS degrees and with some other certifications. The best time to start looking for academic jobs is from November-Decembe

Great Training Videos for Badminton Players - Beginners & Advanced

Beginners: Badminton Etiquette How to Hold Badminton Racket Footwork Drill Return Low Service in Doubles Advanced: Forehand Spin Net Shot Backhand Spin Net Shot Backhand Cross court deception   Jump Smash Badminton Backhand Technique Backhand Smash Extra Power in Smash   Badminton Doubles Backhand drive 7 Tactical Advice for Singles Player Forehand Deceptive Clear How to change grip   Badminton Deceptive Shots (Playlist) Badminton Lessons from BWF (Coaching Level 1)