Chapter 15 Planning for Retirement Dillon Swanson

Key Terms I Reverse Mortgage- loan against borrowers home Reverse Mortgage- loan against borrowers home Heir- Person who will inherit property of someone who has died Heir- Person who will inherit property of someone who has died Estate- All the person owns Estate- All the person owns Will- Legal document that tells how the someone's estate is distributed once they die Will- Legal document that tells how the someone's estate is distributed once they die Codicil- legal document that modifies part of the will Codicil- legal document that modifies part of the will Trust- Document which someone gives someone else control of property Trust- Document which someone gives someone else control of property Power of Attorney- Document authorizing someone to act on your behalf Power of Attorney- Document authorizing someone to act on your behalf Estate Tax- tax on property Estate Tax- tax on property Inheritance Tax- Tax in things inherited Inheritance Tax- Tax in things inherited Gift Tax- tax on the gift of money or property Gift Tax- tax on the gift of money or property

Planning to Retire You will need to save between 75 and 85 percent of your pretirement income to live comfortably. You need to limit current spending and start saving for retirement. Current law says couples selling their home, they have lived in at least two years without paying taxes on the profits up to $500,000.

Retirement funding Most couples that retire usually move out of their home into a smaller home because it is easier to clean and maintain and is cheaper. People that have invested when they were younger move their money out of investments and put their money in bonds that give them interest. After retiring you need to change your insurance. For retired people, the crucial need for insurance falls in the area of health being sure that an illness or injury will not wipe out a lifetime of saving and investing.

Estate planning To provide for proper disposal of assets and to avoid taxes whenever possible, there are a number of good estate planning tools. These include wills, trusts, joint ownership of assets, and powers of attorney.

Sample Will

Taxes  The federal government levies an estate tax, which is a tax on property transferred from an estate to its heirs. An estate must be worth more than 3.5 million to include this tax.  The state inheritance tax is imposed on an heir who inherits property from an estate.  A gift tax is applied to a gift of money or property. It is paid by the giver, not the receiver, of the gift.

Key Terms II Individual Retirement Account (IRA)- Retirement plan that allows people to put money away for retirement until they start withdrawing at age 59 1/2 Individual Retirement Account (IRA)- Retirement plan that allows people to put money away for retirement until they start withdrawing at age 59 1/2 Traditional IRA- An IRA in which you can deduct contribution each year from your taxable incomes Traditional IRA- An IRA in which you can deduct contribution each year from your taxable incomes Roth IRA- contributions are taxed, earnings are not Roth IRA- contributions are taxed, earnings are not Keogh Plan- a tax deferred retirement savings plan for self- employed individuals and their employees Keogh Plan- a tax deferred retirement savings plan for self- employed individuals and their employees Simplified Employee Pension (SEP)- Tax-Deferred retirement plan available to small businesses Simplified Employee Pension (SEP)- Tax-Deferred retirement plan available to small businesses

Key Terms II continued… Annuity- Income from an investment paid in a series of regular payments made for a set number of years Annuity- Income from an investment paid in a series of regular payments made for a set number of years Defined-Benefit plan- Company- sponsored retirement plan in which employees receive a set monthly amount based on wages earned Defined-Benefit plan- Company- sponsored retirement plan in which employees receive a set monthly amount based on wages earned Defined-contribution plan- Company sponsored retirement plan in which employees receive a periodic or lump-sum payment based on their balance Defined-contribution plan- Company sponsored retirement plan in which employees receive a periodic or lump-sum payment based on their balance 401k plan- Defined-contribution plan for employees of companies that operate for a profit 401k plan- Defined-contribution plan for employees of companies that operate for a profit 403b plan- Defined contribution plan for employees of schools, nonprofit organizations, or government units 403b plan- Defined contribution plan for employees of schools, nonprofit organizations, or government units

Retirement Accounts The IRA is a retirement savings plan that allows individuals to set aside up to a specified amount each year and delay paying tax on the earnings until they begin withdrawing it at age 59½ or later. Roth IRA is a type of IRA where contributions are taxed, but earnings are not. With a Roth IRA, you pay tax on your income before you put it into the account. After a five-year holding period, and at age 59½, you can begin making tax-free withdrawals. This is the opposite of a traditional IRA, for which you pay tax on the earnings as well as the contributions when you withdraw the money at retirement.

Withdrawing From Accounts For early withdrawals of IRAs, before age 59½, a 10 percent penalty is imposed on the amount withdrawn. This penalty can amount to a lot of money, so you should avoid withdrawing money early. In addition, the money you withdraw is subject to federal and state income taxes in the year of withdrawal.

Keogh Plan A Keogh plan is a tax-deferred retirement savings plan available to self-employed individuals and their employees. In 2008, Keogh contributions were restricted to $46,000 or 25 percent of earned income in any one year, whichever is less. Earned income is your net income after subtracting business expenses, including contributions to the plan for employees. The amounts an employer contributes are fully tax deductible. Earnings on Keogh plans are also tax- deferred. Withdrawals cannot be made before age 59½ without penalty, and withdrawals must begin by age 70½.

SEP A Simplified Employee Pension (SEP) plan is a tax- deferred retirement plan available to small businesses. SEPs were authorized by Congress to encourage smaller employers to establish employee pension plans with IRAs as a funding method. Employees also can make contributions up to a $2,000 limit. Employee contributions to these plans are also tax-deductible.

401K A 401(k) plan is a defined contribution plan for employees of companies that operate for a profit. Under a 401(k) plan, employees choose the percentage of salary they want to contribute to their account. The employer deducts this amount from their paychecks and puts it into the employees’ individual accounts. This amount is not part of the employees’ taxable income for the year, so they do not have to pay taxes on it until they withdraw the money at retirement.

403B A 403(b) plan is a defined- contribution plan for employees of schools, nonprofit organizations, and government units. Under a 403(b) plan, employees contribute a percentage of their salary toward this tax- deferred account. While the rules may vary slightly, the 403(b) plan operates like a 401(k).