American employees who started saving for retirement in the 1980's with the 401K plan are either approaching or in their retirement age. They now ask the question; how much money is needed to retire. The answer is fairly simple: their income for retirement should match the lifestyle they want to maintain. They may make distributions from their 401K retirement plan when they reach the age of 59 In 1981 Senate enacted the Economic Recovery Tax Act or the ERTA allowed employees to contribute to the Individual Retirement Account or IRA on top of their traditional retirement plan coverage. Maximum allowed IRA contributions started with $1,500 in 1975 to $5,000 in 2010. Further, in 2002 employees over 50 years old were allowed to make the so-called "Catch-up Contributions" or additional contributions to their IRA fund to help increase their expected income for retirement.
In order to compute for the disposable income for retirement one must consider the contributions made to the 401K and/or to the IRA fund plus income from the investments of these same funds. The IRA funds, like the 401K fund, are invested in stocks, bonds or the money market or a combination of these. Depending on how well placed the funds are, the earnings could be a considerable amount. One should factor in the taxes that have to be paid for distributions. The taxes on regular income are imposed on the distribution on the year the distributions are made even if the distribution includes earning derived from investing the funds. Distributions made before reaching the prescribed age or premature distributions are imposed a penalty of 10 %. This could have a severe effect the expected income for retirement.
Care must be taken to make minimum distributions before April 1 after reaching the age of 70 Failing to comply with this provision would result in a penalty amounting to 50% of the amount that should have been distributed will be imposed. The expected income for retirement would be decreased. The minimum distribution is set in a table provided by the IRS and is based on life expectancy either of the retiree or his beneficiary. Distributions can be made in lump sum or in instalments depending on the desires of the account holder.
The retiree sometimes opts for lump sum distribution in order to increase his income for retirement by investing the fund in a business enterprise. This option is applicable for those who are inclined to go into business and still willing to work. This option is not open for those who intend to take it easy after retiring because going into business requires as much or even more hard work than being employed.
All of these factors affect the determination of how much money is needed to retire. Personally, I rolled over my 401K fund into an IRA account when I changed employers in order to avoid being penalized with excise taxes. I likewise made catch-up contributions after turning 51, in order to support my goal of travelling the world when I retire.
No comments:
Post a Comment