If you have a traditional IRA, your contributions might be tax deductible but your distribution may be taxable. To avoid tax when you take your money out of your account, you must be at least 59 ½ years old. In addition, you must take some money out of your account before you reach 70 ½ years old or you will be subject to significant penalties. The amount you must have withdrawn before reaching 70 ½ years old is determined by the Required Minimum Distribution calculation. The Required Minimum Distribution is determined by your account balance, your age, the age of your beneficiary and whether your sole beneficiary is also your spouse.

While taking an IRA distribution before age 59 ½ can result in penalties, there are a number of exceptions to this rule. Penalty-free withdrawals can me made from an account before age 59 ½ by your beneficiaries upon your death or if you become disabled. You can also use the money to pay for qualifying medical expenses that exceed 7.5% of your adjusted gross income or to pay for health insurance if you become unemployed. You can use the money to pay for the cost of higher education for yourself or your spouse, or your children and grandchildren. You can also use up to $10,000 penalty-free for a first time purchase of a home. While taking money for these purchases does not incur any penalties, you may be subject to income taxes for the money you have withdrawn. There are a number of other ways to take money from your account without penalty that concern excessive payments and other circumstances, however, these rules can be more difficult to understand and are best utilized with the help of an experienced financial advisor.

Because Roth IRA contributions are not tax deductible, you can withdraw your contributions (not your earnings) without income tax penalties. Earning can be withdrawn without penalty if you have reached age 59 ½, have become disabled or the earnings are being distributed to your beneficiary upon your death. You can also use up to $10,000 for the first time purchase of a home.

Taking an IRA distribution incorrectly can lead to significant penalties. In most cases, it is best to seek the advice of your accountant or financial planner before removing your money.

Married couples usually have individual careers of their own before they get married. When they were newly-weds, both of them were enjoying their personal incomes and sharing in the expenses at home, such as groceries, bills, fuel and mortgage loans. However, when the first child comes, some couples must sit down and talk about one of them giving up work to stay with their child and take care of him at home while he is very young. Giving priority to the child is often a worthwhile choice for the couple. And this is a very important decision that would change the set up of their daily lives from there on, having only one of them working for the whole family.

Either the wife or the husband must give up the jobs that both of them have grown to love through the years, all for the welfare of their child. Nothing could matter more to them. Knowing that the sacrifice would be worth it, the choice would always end up with one who has the lesser salary giving up his career to stay at home. For example, this can be the wife. She could stay and work at home if she chooses to, in order to earn some sort of income for herself and share in the expenses at home. However, she would have no 401(k) benefits and no retirement savings for now.

But the good news is, the working partner, her husband, could volunteer to pay for the contribution for an Individual Retirement Account of his spouse. This kind of contribution is called spousal IRA.

Spousal Ira could only be done when the two parties are legally married. Here, they must file a joint income tax return with the working spouse having a taxable income for the year, and the non-working spouse, if ever she has a taxable income working from home, her income must be lesser than the working spouse’s income. Getting a spousal IRA for the partner who stays at home is important, so that the one who stays at home, giving up her career for their child’s sake, will also have a sense of security later on, come retirement age.

The benefits of having an individual retirement plan or IRA is that people having that will be able to set aside some amount with compounding interest throughout the years that they could later on withdraw when they reach the age of 59 1/2. This could amount to something that would give them some sort of security or financial freedom at that age, and they would be able to do some of the things that they want to accomplish or dream about like travel or moving to another state later on.

The difference between an Ira and a 401(k) benefit is that the 401(k) benefit is salary deductible and usually, the employer shares in that contribution. However, for the Ira, the couple are the ones paying the contribution out of their salaries without any contribution from the employer. Both are tax-deferred, incurring only taxes at the time of withdrawing the money at age 59-1/2.

People who wish to get the 403 plan normally have a few choices to go for when it comes to the kind of assets that their employees can endow into their personal accounts. This includes the following:

• Tax Deferred Annuities, otherwise the Tax-Sheltered Annuities. These refer to the kind of annuity contract given by insurance companies in order to give income later on in life.
• A custodial account at the right institutions like the brokerage firm that possess the securities enjoyed by registered investment companies like mutual funds. Basically, this is the most frequently understood kind of 403 retirement plan.
• A plan that enlists either kind of investment preference as an option for the owners; that is, they are allowed to invest in eligible annuities or in securities like no load mutual funds.

When talking about the benefits given by the 403 retirement plan, it is safe to say that everything is just like what the 401k plan has to offer. First of all, it provides the ability to attract as well as retain employees because it offers matching benefits. A good example of this is that a company can endow the ability to match the contributions of employees to the 403 plan during the first 3 percent of the payroll.

Furthermore, the money in this plan can grow tax deferred for years which may even continue to decades which result to more savings for the account owner. It is only that time when the person who owns the account starts to make withdrawals from their account that they will have to pay the taxes on the funds.

Also, the account owner can get loans against their 403 retirement plan in case they found themselves in an emergency situation wherein they badly needed the cash to spare. The loan must be paid in return; this is the same with the regulation imposed by the 401k counterpart. If loan is not paid, significant tax consequences will be imposed.

When talking about the contribution limit of this plan, the government actually gives a high contribution limit for people who wish to get this. The ceiling potential contribution would equal to $49,000 each year for the fiscal year of 2009 as long as the person can meet all of the conditions imposed.

At the age of 59.5 years old, the person can start to get 403 withdrawals without any penalty. There is just a need to pay for regular income taxes. In case a person is younger that the said age, he or she will be subjected to 10% tax penalty. There is however a chance to prevent this penalty, a person just needs to meet the special consideration imposed by the law for early withdrawal penalty exemption.

When you own a business, SEP IRAs should be established separately by you and any eligible employee. The employer’s contributions are then made into each eligible employee’s retirement plan.

If you are looking for an easy and low-cost retirement plan, SEP could be the answer. SEP can actually provide you a great source of income when your retirement comes. You are allowed to save money in your retirement account.

Under SEP, the employer contributes directly to traditional Individual Retirement Accounts (SEP IRA) for both the employer and the employees. SEP doesn’t have a start-up and operating costs of a conventional retirement plan. A contribution of up to 25% of each employee’s is allowed.

What are the advantages of a SEP?

• SEP contributions are tax-deductible. Your business will pay no tax on the investments’ earnings.
• You are not obliged to make annual contributions. Actually you can decide each year whether you would contribute and how much you would.
• No documents are needed to be filed with the government.
• Sole Proprietorships, partnerships, and corporations are allowed to set up SEP IRA.
• You are eligible for a tax credit of up to $500 for each year of the first three years. This is for the cost of starting the plan.
• The costs for the administrative are relatively low.

In establishing a SEP, there are few easy steps to follow.

• Get in touch with a professional or a representative of a financial institution that do offer retirement plans. Choose IRS model of SEP (form 5305-SEP).
• It can be established until as late as the due date, including the extension period of the company’s income tax return for the year that you want to establish the plan.
• You need to choose a financial institution for your SEP, this is important. Usually SEP IRA trustees are banks, mutual funds, insurance companies that issue annuity contracts and other financial institutions that have been approved by the IRS.
• Fill up and sign the form 5305-SEP. When done, the form becomes the basic legal document of the plan. Don’t send it to the IRS but instead you just use it as reference since the plan’s terms are in that document.
• Render a copy of the form 5305-SEP (or any other plan documents) to your employees, including its instructions along with information regarding SEP IRAs.
• The SEP model will not be considered adopted until each of the employees are provided with a written statement. This written statement should explain that
  • A SEP IRA may provide different rates of return. It contains different terms than the other IRAs they may have.
  • The SEP’s administrator will provide a copy of any amendment within 30 days of the effective date, in conjunction with a written explanation of its effects.
  • The participating employees will be receiving a written report of employer contributions made to SEP IRAs by the end of January of the following year.

Before, a retirement savings is not that popular. Since most employers then have pension plans for their employees. But with the current crisis, more and more people are relying on their own personal savings and social security benefits. One of the important benefits of having retirement savings is that you will have the time and money to do what you’ve always wanted to do after you retire. It could be starting a new hobby, going to different places, buy some properties, open up your own business or simply spend time with the family.

Let’s say you are a 50-year old executive who wants to plan for his or her future. You plan to retire by 65 and want to start saving up for your retirement. The next 15 years will see you depositing a great amount of your paycheck to a retirement account. The good thing about retirement plans is that you will see your investment grow through interests as you complete the 15-year plan. By the time your plan matures, you’ll be getting much more than you initially invested.

When you are already 50, you should begin making catch-up contribution. At 62, you’ll be able to get your social security benefits. But should you choose decide to keep it for later, it would be better as a bigger monthly benefits awaits you. Sixty-five is the law-accepted retirement age. By this time, you are already eligible for medicare benefits. Before you even reach 71, you can start taking minimum withdrawals from your retirement account.

The key really is to quit worrying and start planning. If you are afraid of the uncertainties about investing for your retirement, then start figuring out your financial futures. It is probable that you will change your retirement plans once you have gathered all the facts. Despite all that, there are still some who would rather keep their money rather than invest it. The recent economic crisis has put the world financial institutions to a tight spot. While we may never know when things will get better, an alternative would be to spread your investments or asset allocation so that your money is diversified. By doing this, you are also spreading the financial risk. You can choose to invest in bonds or “fixed income investment”, in stocks, or index funds.

The strategies for investing while you’re taking withdrawals are significantly different from the strategies for investing while you’re still saving. Funds that guard against big losses in a bear market, for instance, might be better than those that post big gains in a bull market.

To illustrate how dramatically withdrawals can change your investment strategies, take a look at how the 15 largest stock funds of 1996 would have fared after 10 years of withdrawals.

This 10 year period is telling because the decade encompassed pretty much every type of investment phase imaginable. Stocks enjoyed an astonishing bull market from 1997 through 2000, endured a bone-jarring bear market from 2000 through 2002 and finally skated through a relatively mild bull market for the rest of the period.

Naturally, funds that produced the highest total returns in the past 10 years left you with the most money at the end of the period. Fidelity Contrafund gained about 180% for the 10 years that ended in 2006. Even after withdrawing $106,259 — an initial 8% withdrawal rate — you’d still have $107,664 left in your account after 10 years. But, avoiding big losses was even more important than scoring big gains.

American Century Ultra jumped 42% in 1999, compared with 25% for Fidelity Contrafund. By the end of 1999, your Ultra balance would have been $166,741, vs. $152,223 for Contrafund, assuming you began with an 8% withdrawal rate.

Bear markets, though, hurt you much more when you’re taking money out of your account. Ultra lost 19.9% in 2000, 14.6% in 2001 and 23.2% in 2002. By the end of 2002, your Ultra account would have fallen to $66,520, including withdrawals.

By contrast, Contrafund’s worst calendar-year loss from 2000 through 2002 was a 12.6% tumble in 2001. By the end of 2002, your Contrafund account would have stood at $86,372.

A 1998 study by three professors at Trinity University in Texas looked at success rates in retirement, using different withdrawal rates. Success, to the authors, meant having money left after 30 years. They reviewed stock returns from 1926 through 1995 and adjusted withdrawals for inflation each year. If you started with a 5% withdrawal rate in an all-stock portfolio, your success rate was 85%. If you started with an 8% withdrawal rate, your success rate plunged to 41%.

The Trinity study found that an all-bond portfolio had just a 17% success rate after 30 years — and that’s if you started with a 5% withdrawal rate. A mix of 50% stocks and 50% bonds raised the success rate to 76%.

The top funds of any given 10-year period will rarely be the best funds over the next 10 years. But, if you start taking small withdrawals and try to limit your losses by choosing an appropriate asset allocation, your money could last longer than you imagine.

The short answer to the question is, no. By law, you can not withdraw 401k contributions, that is, pre-tax salary deferrals, before severance, plan termination, turning 59 1/2, death, disability or hardship (and you can’t roll over hardship withdrawals).

The long answer is, yes, under certain circumstances, you can.

The standard exceptions do apply, for example, if you are 60 years of age or older, and still working, most qualified plans allow “age 59 1/2 rollovers”. If a particular plan does not, they most likely allow rollovers at age 65. The exceptions can add to the confusion and there is such a thing as the “in-service withdrawal”.

To me, the most interesting exception being the fact that the law only applies to your pre-tax salary deferrals. You CAN rollover (or otherwise withdraw) employer contributions, or employee (after-tax or rollover) contributions. And you can do so without any required taxes or penalties.

This can be a big deal. I know someone who’s matching contributions from his company were paid in company preferred stock and it ended up comprising a whopping 75% of his total plan holdings. He was not allowed, then, to diversify any matching funds elsewhere within the plan.

Being able to rollover the employer contributions was a great opportunity for him diversify his porfolio, get back to a better asset allocation, and contribute to more cost effective funds. But, it was not without penalty. The penalty (defined specifically by his company’s plan) was that he could not contribute to his plan for 12 months beginning from the day the withdrawal took place.

Some employer retirement plans have provisions for you to do a 401k rollover on some of the assets while you are still employed by the employer, but you’ll need to check with your employer to see if they allow it, and what penalties may be associated with it. Most 401k prospectuses and companies in general don’t make this common knowledge to employees.

Thirty-six percent of older baby boomers, age 50-59, with an average net worth (not including primary residence) of $1.7 million plan to retire in the next 6-10 years and 28 percent plan to retire in less than 5 years. Of those planning to retire, 62 percent do not have a written financial plan for retirement.

Furthermore, the vast majority of younger affluent boomers, age 41-49, with an average net worth of over $900,000, who have a longer retirement horizon of between 6-15 years, have no written financial plan for retirement.

Planning for retirement should begin as early as possible in your life, but with some careful thought, however, the planning process can be started at any time in your work career. The secret is to actually put together a plan no matter what your age. The following tips will help you get started on planning your retirement:

1. Review your finances
If you know where you are, you can prepare for where you are going. If you are deep in debt, chances are you are not prepared for your eventual retirement. No matter what your age, you should be putting something back for your retirement. It’s estimated you will need between 70% and 90% of your current income to maintain the same standard of living after retirement.

2. Review your retirement needs or goals
What is your idea of retirement? For some, it’s sitting on the porch and watching the grandkids play. For others it’s traveling. For still others, it’s somewhere in between. What are your retirement needs or goals? Knowing what you plan to do can give you some idea of what you will need in the way of money and health.

3. Develop a healthy lifestyle
When you retire, you no doubt want to be healthy so you can enjoy every minute. Now might be the time to lose the extra fat, start an exercise program, or quit smoking. Frugal saving and living habits to prepare for retirement won’t mean a thing if you don’t feel like getting out of bed once you retire.

4. Talk to your HR representative about your employer’s retirement plan
If your employer provides a pension or other retirement plan, ask for a summary plan description and ask for an explanation of the plan. Find out what you can contribute and if your employer provides matching funds. Also ask about vesting.

5. Talk to your spouse about his/her retirement plan
If you are married, you should discuss your spouse’s retirement plan to find out what benefits you might be entitled to receive. You should thoroughly understand any consent forms or waivers that you might be asked to sign for your spouse’s retirement plan distributions.

6. Review your benefit statement
Your employer should provide an Individual Benefit Statement periodically. This benefit statement shows your total plan benefits along with the amount that is owned by you. You should thoroughly review this statement and if there are areas that you don’t understand or disagree with, you should talk to your benefits administrator immediately.

7. Open an IRA
Almost all Americans can open an IRA if they or their spouse has earned income. An IRA can be either a traditional IRA or a Roth. You bank or other financial institution can tell you whether you are eligible to open an IRA and help you with the process. Once you open an IRA, you should contribute the maximum allowed each year.

8. Review your Social Security Statement
Each year, you should receive a Social Security Statement about three months before your birthday. This is a record of your earnings that have had Social Security taxes paid. It also has an estimate of the benefits you or your family might receive from those earnings.

9. Discuss your retirement goals with your spouse and family
This is especially important if you are near retirement age. Your spouse might have different retirement goals and you will need to come to some sort of compromise. Your family should be aware of long range plans that might affect them.

10. Think about how you will spend your time
Nothing is more frustrating than to have time on your hands and nothing to do. Once you retire, you might want to take another job, volunteer, travel, enjoy a hobby, and so on. Take some time to think about what you might want to do before you wake up that first morning and don’t have to go to work.

11. Evaluate your life insurance
You may or may not need life insurance but it’s a good idea to do your homework to determine its benefits. This is especially true if you have a family who would be left with no means of income or huge debts if you were to die. A life insurance policy can also be used to pay the taxes on inherited IRAs or other retirement funds in your estate.

12. Determine if you need long term care insurance
No one likes to think about being in a nursing home or needing special care but as we get older, this is a possibility. A major illness could wipe out your retirement savings.

While these 12 suggestions on how to prepare for retirement won’t guarantee that you will be ready for the big “R”, they will give you some ideas on how you can prepare. By planning for your retirement, you will at least be ready for this time of your life.

The following are faulty assumptions many people make that undermine retirement plans and prevent them from retiring when they want with the lifestyle they want.

• “I’ll be OK because I’m investing the maximum amount in my company 401(k) plan.”
  

While it is certainly your best move to invest the maximum amount to your employer-sponsored retirement plan for tax-deferred savings, especially if it offers a company match, recent statistics indicate your 401(k) savings alone will not be adequate. The typical 50-year-old has less than $130,000 saved in his or her account; workers 60 and older have slightly more than $136,000. That’s enough to generate just $6,000 to $7,000 a year of income during retirement, assuming they withdraw no more than 5 percent of their accounts each year. Given these numbers, it makes sense to consider investments outside of your company 401(k) to enhance your retirement nest egg.

• “My parents are leaving me and my siblings their estate, and I can retire on that.”
  

Recent data shows that inheritances are shrinking. In 2004, according to the Federal Reserve, the median inheritance was $29,000 — enough to buy a new sedan, but hardly enough to quit your day job. Although the overall pie of inheritances has grown to nearly $200 billion annually, experts predict baby boomers will receive smaller pieces, in part because old age has gotten more expensive and the typical boomer has more than two siblings. The bottom line: Don’t count on those family assets being there for you when you need them.

• “The equity in my house has quadrupled over the past 25 years and I can tap into that for retirement.”
  

Home equity is an important part of any retirement plan. But many investors fail to recognize that escalating housing prices cut two ways. On the one hand, the value of your home has increased, in some cases by more than 100 percent. On the other, you’ll have to find someplace to live when you cash out of your primary residence. That’s likely to cost you plenty — and give the seller a little more cushion for their own retirement.

• “Inflation will remain low.”

Workers usually keep up with inflation through pay raises. In retirement, however, people must increase their income to keep pace with the cost of living. True, overall inflation has remained low in recent years, but that doesn’t mean some prices aren’t rising. Just take a look at your last heating bill.

Your retirement should not be left up to chance, so when you are planning yours, don’t let faulty assumptions determine the quality of your retirement.

At the core, Brown says there are two big myths. One is that Social Security is fine and won’t run out of money. The other is that personal accounts are a free lunch; they can save Social Security from going bankrupt as well as help Americans salt away enough money for a secure retirement. But those are just myths, says Brown.

Myth 1: Social Security is financially sound for decades to come

The Social Security Trust fund is projected to have sufficient resources to pay full retirement benefits through the year 2041. The truth, however, is that Social Security is not on solid footing for decades to come.

Baby boomers, some 77 million people, will start claiming benefits as early as 2008. And given that Social Security is a pay-as-you-go system, its cash-flow surpluses will start declining then.

“This pressure will necessitate significant changes to the Social Security system and/or the rest of the federal budget, possibly including spending cuts, tax hikes or increased borrowing,” he says. “To argue that we can ignore the problem for several decades simply because we have an accounting balance in the Trust Fund is fiscally and economically irresponsible.”

Myth 2: Personal accounts can save Social Security without benefit cuts or tax increases

The financial problem facing Social Security is simply this: you can’t sustain a pay-as-you-go system in the face of a declining worker-to-beneficiary ratio.

“The simple economic and mathematical reality is that there is no easy, cost-less or “pain-free” solution to the problem.”

Proponents of personal accounts have argued that if we divert existing tax revenue to personal accounts we can have a free lunch.

The only problem with this approach? “It is not true,” he says. “If it were possible to provide guaranteed benefits that are higher than today’s promised benefits with no tax increases, then every single Republican politician, economist and policy analyst, as well as most Democrats, would be falling over themselves in a rush to sign on.”

“Many policies alone or in combination make economic sense,” he says. But “we will need to fix the lion’s share of Social Security’s problems by reducing the rate of growth of benefits,” he says.

“We shouldn’t kick the problem down the road for 10 years for others to deal with it nor should we pursue policies that don’t fix the problem but appear to,” he says. “There are no easy solutions. Someone’s ox must be gored. We either need more revenue or to pay less out of the system. People either don’t understand that or they choose to ignore it.”

Even the optimistic projections on Social Security don’t have it around for the time when I retire. So, I’m hoping for changes and not expecting anything.