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Financial Warm-up |
Savings
Fitness: Staying On Track Open
an IRA. You can put up to $3,000 a year into an individual
retirement account on a tax-deductible basis if your spouse isn't covered
by a retirement plan at work, or as long as your combined incomes aren't
too high. This amount remains the same through 2004 and will increase
in 2005 to $4,000. Persons who are 50 or older can contribute an additional
$500 for years 2002 through 2005. You also can put the same amount tax-deferred
into an IRA for a nonworking spouse if you file your income tax return
jointly. (By the way, you don't have to put in the full amount; you can
put in less.) With a traditional IRA, you delay income taxes on what you
put in and on the earnings until you withdraw the money. With a Roth IRA,
the money you put in is already taxed, but you won't ever pay income taxes
Consider an annuity. An annuity is when you pay money to an insurance company in return for its agreement to pay either a regular fixed amount when you retire or an amount based on how much your investment earns. There is no limit on how much you can invest in a private annuity, and earnings aren't taxed until you withdraw them. However, annuities present complex issues regarding taxes, fees, and withdrawal strategies that may not make them the best investment choice for you. Consider discussing this type of investment first with a financial planner. Build your personal savings. You can always save money on your own, either in mutual funds, stocks, bonds (such as U.S. Savings Bonds), real estate, CDs, or other assets. It's best to mark these investments as part of your retirement fund and don't use them for anything else unless absolutely necessary. Investing in an IRA, an annuity, or in personal savings means you are totally responsible for directing your own investments. How conservatively or aggressively you invest is up to you. It will depend in part on how willing you are to take investment risks, your age, the stability of your job, and other financial needs. Learn as much as you can about investing and about specific investments you are considering. You also may want to seek the help of a professional financial planner. Go to www.CFP.net/learn for tips on choosing a financial planner who puts your interests first. What To Do If You Are Self-Employed Many people today work for themselves, either fulltime or in addition to their regular job. They have several tax-deferred options from which to choose. SEP. This is the same type of SEP described earlier under employer-based retirement plans. Only here, you're the employer and you fund the SEP from your earnings. You can easily set up a SEP through a bank, mutual fund, or other financial institution. Keogh. Keoghs are more complicated to set up and maintain, but they offer more advantages than a SEP For one thing, they come in several varieties. Some of the varieties allow you to sock away more money sometimes a lot more money-than a SEP SIMPLE IRA. Described earlier under employer-based retirement plans, a SIMPLE IRA can be used by the self-employed. However, generally you can't save as much as you can with a SEP or Keogh. IRA. Usually you are better off funding a SEP or a Keogh unless your self-employment income is small. Annuities. See annuities under the section on "What to Do if You Can't Join an Employer-Based Plan". |