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Private Sector Employees Can Invest for Retirement With a 401(k) Plan

Years ago, it was common for employers to offer a pension plan to support workers after they retired. Over the past few decades, however, most employers have stopped offering pensions, and many offer a 401(k) retirement plan instead. With a 401(k) plan, you are in charge of your retirement account. That means you are in charge of how much money you will have in retirement. While that may seem intimidating, the biggest step is simply to start contributing to your plan. And remember, you don’t have to go it alone. A financial planner can help you make decisions that reflect your goals and risk tolerance

How a 401(k) plan works

In general, a 401(k) is a retirement account that your employer sets up for you. When you enroll, you decide to put a percentage of each paycheck into the account. These contributions are placed into investments that you’ve selected based on your retirement goals and risk tolerance. When you retire, the money you have in the account is available to support your living expenses.

Your contributions are tax-deferred

Your 401(k) contributions are deducted right from your paycheck and go directly into your account before taxes are withheld. So if your salary is $50,000 a year and you contribute $3,000 to your 401(k), you will pay income tax on $47,000 next April instead of the entire $50,000 that you earned. When you withdraw money from your account in retirement, it will be subjected to taxes. But since you’ll be retired, you’ll possibly be in a lower tax bracket. Take full advantage of the tax-deferral by contributing the maximum amount allowed by your company. Check with your human resources department for limits and details. Please keep in mind that all investing involves market risk, including the possible loss of principal.

You may get free money from your employer

Your company may match a certain percentage of your 401(k) contributions – most do. For example, if your company matches 0.5% for every 1% you contribute up to 6%, that translates into an extra 3% in your account if you take advantage of the entire match. With the example above, your $3,000 contribution plus your employer’s match would add $4,500 to your 401(k). That’s like receiving free money just for participating in your retirement plan. (Your company will have rules about when the entire match is yours. Get the details from your employer.)

You can avoid penalties by leaving your money in your 401(k)

Since 401(k)s are designed to help you save for retirement, there are stiff penalties for taking your money out early. You’ll owe income taxes on the total amount and, if you're younger than 59½, also may owe a 10% early-withdrawal penalty. Plus, the IRS requires your employer to withhold 20% of your account value to pre-pay at least part of the taxes you’ll owe.

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Some basics on your 403(b) plan

Employees of companies in the private sector have 401(k) plans to help build their retirement savings. But what exactly is a 403(b) plan? If you’re a school teacher or work for a tax-exempt organization, a 403(b) plan is a tool that may help you reach your retirement goals. 403(b) retirement plans are also known as tax-sheltered (or tax-deferred) annuities.

Here are a few things to consider about the 403(b) option

Who is eligible?

Tax-deferred 403(b) plans are designed for employees of public schools, colleges and universities, churches and other religious organizations. Employees of certain other tax-exempt, non-profit organizations such as charities or certain hospitals can also participate in a 403(b) retirement plan.

Why participate?

A 403(b) plan lets you set aside a portion of your salary in an employer-sponsored account to save for retirement. Some employers may also match your contribution. That’s like getting free money for participating in your retirement plan. You don’t pay taxes on your contributions to the plan, or on any earnings the account accumulates until you withdraw the money – which ideally happens when you’re retired. And by then you may be in a lower tax bracket – so there are potential savings every step of the way.

Professional advice

With a 403(b) retirement plan, you can typically invest in fixed annuities, variable annuities or mutual funds. Ask your advisor to help you choose investments that best meet your retirement objectives. Also remember that investing involves market risk, including possible loss of principal, and there's no guarantee that your investment objectives will be met. Enrolling in your employer’s 403(b) retirement plan is a big step in preparing for your future. You can start small − the important thing is that you start investing now so your money has time to potentially grow. If your employer doesn’t offer a 403(b) plan, find out if they have another kind of retirement plan. Or ask your investment professional about other ways to start investing for retirement.

Early withdrawals – and why to avoid them

Because 403(b) plans were created to help you save for retirement, there may be harsh penalties for withdrawing money early, including:

•Income taxes on the total withdrawal

•A 10% penalty if you’re younger than 59½

•20% federal income tax withholding – unless the entire amount is rolled over to another qualified retirement plan or IRA

Prepare for Retirement With a 457 Plan Designed for Government and Non-Profit Workers

Deferred compensation plans, also known as 457 retirement plans are designed for state and municipal workers and employees of some tax-exempt organizations. If you participate in a 457 plan, you can contribute a portion of your salary to a retirement account. That money and any earnings you accumulate are not taxed until you withdraw them.

The difference between a 401(k) and a 457 retirement plan

Although they’re alike in many ways, there are some differences between 401(k) and 457 plans, particularly when it comes to early withdrawal penalties and minimum required distributions. With a 457 retirement savings plan:

•There isn't a minimum retirement age

•There isn't a 10% federal penalty for early withdrawal of funds, although withdrawals are subject to ordinary income taxes

•There is a withdrawal option for unforeseen emergencies that meet certain legal criteria, if all other financial resources are exhausted

•Distributions are available in a lump sum, annual installments or as an annuity

•There is no tax withholding if you leave for a new job and roll over your money into an IRA or your new employer's 401(k), 403(b) or 457 plan – or if you take regular installments for 10 years or more. (All other distributions are subject to 20% withholding for federal taxes.)

Keep in mind that federal income tax laws are complex and subject to change. Neither FA nor our representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.

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A traditional IRA: flexible savings & potential tax shelter

The Individual Retirement Account (IRA) is one of the most popular tools for Americans to build up savings for retirement. Traditional IRAs are flexible and offer a variety of investment options. You decide how much you want to invest (up to a maximum allowed per year) and how often to contribute to your IRA. As long as you’re under the age of 70½ and are earning income (income from investments is not considered “earned”), you’re eligible to contribute.

What traditional IRAs offer

•Potential for tax-deductible contributions

•No taxes until money is withdrawn

•A variety of investment choices

•Eligibility even if you’re in another retirement plan

Investing does involve risk, including possible loss of principal, and there is no guarantee that your investment objectives will be achieved. Starting at age 70½, you must take minimum distributions from traditional IRAs. .

How to open an IRA for yourself

Want to open a traditional IRA but don’t know where to begin? Your investment professional can help you. Before meeting with your investment professional, you should prepare by gathering the following information about your personal finances:

•Statements from your employer-sponsored retirement plan

•Statements from other investments, including any other IRAs

•Checking and savings account balances

Neither FA nor our representatives give legal or tax advice, so consult your attorney, legal or tax advisor about these questions.

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Enjoy tax-free income after you retire with a Roth IRA

Like other retirement savings plans, Roth IRAs allow you to save and invest money for your retirement. The key difference: your contributions to a Roth IRA are made with after-tax dollars. That means you’re taxed on the funds now, as you put them in. For a long-term tax strategy, this could be very useful.

Taxes and Roth IRAs

Although you can’t deduct contributions on your federal taxes as with a traditional IRA, the advantage is that after you retire, your withdrawals will be tax-free (as long as certain requirements are met) since you’ve already paid taxes on the money. So the Roth IRA may be a good choice for you if the potential for tax-free income in the future outweighs your need for a tax deduction today.

Roth IRA withdrawal rules

•Withdrawing principal – You can withdraw the money you’ve contributed to a Roth IRA income-tax free at any time.

•Withdrawing earnings – If you’re older than 59½ and you started your Roth IRA at least five years ago, then any money gained on top of the principal (your earnings) can be withdrawn tax-free. Otherwise, withdrawals may be taxable and could be subject to an early-withdrawal penalty.

•Withdrawals for special circumstances – You may be able to withdrawal earnings prior to age 59½ without penalty under certain circumstances. Ask your tax advisor to learn if your specific situation is eligible.

No minimum distribution required

Another nice bit of flexibility: you don’t have to begin withdrawing from your Roth IRA at 70½ as you do with a traditional IRA. You can leave your earnings in your account to continue growing income-tax free as long as you live. However, when you die, your beneficiary will be required to take distributions. Money in your account could be subject to estate taxes


There are some income limitations for Roth IRAs. You’ll find current limits on the IRS website. There is no minimum or maximum age for contributing to a Roth IRA. You can contribute to a Roth IRA even if you participate in a retirement plan through your employer. You can open as many Roth IRAs as you choose, but the annual contribution limit applies to the total of all your accounts.

Getting started

Before opening a Roth IRA, ask your investment professional or tax advisor these questions:

•Am I eligible to participate?

•Is a Roth IRA in line with my long-term investment objectives?

•Which investments in the Roth IRA are suitable for my investing style and timeframe?

•Will the tax rules of a Roth IRA work to my advantage?

Keep in mind that federal income tax laws are complex and ever-changing. The information presented here is based on current interpretations of the law and isn’t guaranteed beyond the current tax year. Again, consult a trusted advisor. Also remember, all investing involves risk, so there’s no guarantee you’ll reach your investment goals. Neither FA nor our representatives give legal or tax advice, so consult your attorney, legal or tax advisor about these questions.

IRA rollovers: you can take it with you.

You're on the job, setting aside money in your employer-sponsored retirement plan. You decide to terminate employment or retire. If you are under age 59 ½ and take a lump sum withdrawal, it may be subject to an additional 10% early withdrawal tax. This withdrawal will also be subject to ordinary income tax. Rolling this money over to your IRA may be a better solution.

What is a rollover IRA?

An IRA rollover occurs when you transfer money from employer-sponsored retirement plans into a traditional or Roth IRA. In a rollover, you’re keeping your money tax-deferred until you choose to withdraw it. The rollover option might also give you more investment freedom – options that may not have been available under your employer-sponsored plan. You can also use it to consolidate multiple accounts which may help you manage them more easily. Keep in mind that your IRA may be subject to market risks, including possible loss of principal. Three common reasons to rollover are:

•You get a new job

•Your employer stops offering a retirement plan

•You retire

Keep in mind that there are some IRA rollover rules:

•You can’t take a loan from your IRA

•With a traditional IRA, you must begin minimum distributions at age 70½

•You may lose protection from creditors

Rollover considerations

There are some very good reasons to consider rolling money over into an IRA:

•Preserve retirement savings by avoiding taxes and the additional 10% early withdrawal tax

•Consolidate and simplify your retirement savings into one account

•You can rollover as many accounts as you have – no limits

•Choose from a broad range of investments

Setting up an IRA rollover

Rolling over an IRA can be quick and easy. An investment professional can help. Talk with your advisor to:

•Determine if an IRA fits in your investment portfolio

•Discuss your retirement and long-term financial goals

•Review your financial statements to understand your situation

Learn more

Have more questions about setting up a rollover IRA? Contact your Financial Advisors today. You should consider all factors before making a decision to move any retirement assets. Moving retirement assets from one plan to another may have unintended surrender, fee, or tax consequences. Contact your tax or legal advisor regarding your specific situation. Neither FA nor any of its representatives provide tax or legal advice. Not a deposit • Not FDIC or NCUSIF insured • Not guaranteed by the institution • Not insured by any federal government agency • May lose value

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