Reaching a significant milestone, Orangevale couple Jim and Judy Shephorn have been married for 50 years. Equally impressive, the Shephorns drove to Reno to renew their vows in the same care they drove to get married 50 years ago – a 1965 Chevy Impala. This incredible achievement should remind us all of the importance of early retirement planning.
Great advice from father to son
Jim Shephorn said in an interview that his father gave him great advice when he was young. Jim said, “My dad told me years ago, ‘One of these days you’ll find the right car, and when you do you’ll find the right woman – and all you need is to give them both tender love and care.” The shephorns eloped in Reno in 1966 and have been together ever since. They also renewed their vows on their 25th anniversary as well.
Retirement planning strategies
When it comes to retirement planning, Sacramento couples need to know it is never too late to start. If you believe that you can safely rely on your Social Security benefits, you might be unpleasantly surprised. Instead of taking the risk of relying on government benefits, you need to be practical and create your comprehensive retirement plan now. That way, you can relax and enjoy your retirement the way you always hoped you would. One simple way to get started is by opening Individual Retirement Plans, which can help you start saving and investing in your future.
IRAs and how they work
An Individual Retirement Account, or IRA, is essentially an investment account that offers many tax advantages along with a dependable way to save money for retirement. IRAs do not require you to pay taxes on the investment earnings from the account. Instead, these earnings can be reinvested and compounded so that your account will experience as much growth as possible. Then, after you reach retirement age and start making withdrawals from your IRA, the tax consequences depend on three factors. Those factors include the type of IRA you have, your present income and the amount of your withdrawals.
The various kinds of IRAs available
There are basically four different kinds of IRAs, each with its own advantages. Traditional IRAs and Roth IRAs are opened by individuals, as opposed to Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE) are made available through employers. Regardless, all IRAs are considered “fully vested.” This means that all contributions and earnings belong to the individual, even those contributions made by their employers.
Contribution amounts may be limited
The IRS has imposed certain limitations on the total amount of contributions that can be made to an IRA account each year. These limitations usually change each year, therefore, it is wise to consult with your retirement planning Sacramento attorney to determine the current limitations being imposed.
In 2017, the maximum contribution for both Traditional and Roth IRAs is $5,500, for individuals under the age of 50. For those over age 50, the limit is $6,500. The maximum contribution for a SEP IRA is $53,000. The limit for a SIMPLE IRA is $12,500 if you are under age 50 and $15,500 if you are older.
How traditional IRAs and Roth IRAs are different
A traditional IRA is different from a Roth IRA because it is funded with “pre-tax” dollars. That means you do not pay any taxes on your contributions or the interest those contributions earn until you start taking withdrawals during your retirement. At that point, each withdrawal you make is taxed as ordinary income.
However, a Roth IRA is funded with “after-tax” dollars. A Roth IRA does not provide any tax benefits relating to contributions. But, the earnings and withdrawals from Roth IRAs are generally tax-free. A major benefit of a Roth IRA is that, not only are your earnings allowed to increase tax-free but when you retire and begin receiving withdrawals, you do not pay income taxes. Essentially, you can avoid taxes when you contribute to a traditional IRA, but you avoid taxes with a Roth IRA when you withdraw money at retirement.
How early withdrawal penalties
With all IRAs, the government charges a penalty for early distributions or withdrawals. With a traditional IRA, you will pay an additional 10% penalty if you take any distributions before you reach the age of 59½. The penalty is in addition to the income taxes that are imposed. One benefit of a Roth IRA is that you can withdraw your original contributions at any time, without penalty because you essentially paid income tax on those funds already. However, early withdrawals of your earnings are subject to the 10% penalty, in addition to income tax. The Roth IRA has an additional requirement. Along with the age requirement of 59½, a Roth IRA must be in existence for at least five years before you can begin to withdraw earnings, without penalty.
Download our FREE estate planning checklist today! If you have questions regarding planning matters, please contact us at the Northern California Center for Estate Planning and Elder Law for a consultation. You can contact us either online or by calling us at (916) 437-3500. We are here to help!
Timothy P. Murphy
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