Saving and Investing

1. Saving and Investing

2. Student Learning Objective Compare and contrast the various company sponsored retirement plans and determine which retirement plan is the best to be utilized in this current market condition

3. Employer-sponsored retirement plans can be a great source of income when you retire. And, if your employer offers matching funds, it is like getting free money. http://www.finra.org/Investors/SmartInvesting/GettingStarted/Podcasts/RetirementAccounts/P123181

4. Retirement plans generally fall into two categories: defined benefit plans and defined contribution plans. A defined benefit plan promises you a specified monthly benefit at retirement. The benefit may be a fixed dollar amount or may depend on a plan formula that considers factors such as salary and years of service. Defined benefit plans also are known as pension plans. Employers sponsor defined benefit plans and typically hire investment managers to make investment choices. The employer shoulders the investment risks.

5. A defined contribution plan, such as a 401(k) plan, does not promise you a specific payment upon retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5% of your annual salary.

6. In a defined contribution plan, the employee shoulders the investment risks, and the value of the account will fluctuate due to changes in the value of the investments. Upon retirement, you receive the balance in your account, which depends on contributions plus or minus investment gains or losses.

7. 403(b) Plans A 403(b) plan is a type of tax-deferred retirement savings program available to employees of public schools, certain non-profits, and some members of the clergy. Because you do not have to pay taxes on the amount you contribute to a 403(b) plan for the year in which you contributed to the plan, investing in a 403(b) plan can lower your overall tax burden, at least in the present.

8. You can defer income taxes on your contributions until you begin making withdrawals from your account, typically after you retire. The earnings on your account also grow tax-free until withdrawal.

9. Investment options If you are eligible to participate in a 403(b) plan, you may have to choose among different types of investments. It will be up to you to choose investments that best meet your financial objectives. Typically, 403(b) plans offer fixed annuities, variable annuities, and mutual funds.

10. Although you may be eligible to participate in a 403(b) plan, don't assume that your employer has approved any particular investment product offered or any firm or professional that sells potential 403(b) investments. That's why it's so important to do some homework on your own. For starters, be sure to ask at least the following three key questions:

11. Will I have to pay any penalties if I change my investment choices? If so, how much? • For example, if you withdraw money from a variable annuity within the first few years, the insurance company usually will assess a "surrender" charge. A surrender charge compensates the financial professional who sold the variable annuity to you. • Generally, the surrender charge is a percentage of the amount you sell or exchange, and declines gradually over a period of several years, known as the "surrender period." Some variable annuity contracts will allow you to withdraw part of your account value each year — 10% or 15% of your account value, for example — without paying a surrender charge.

12. Some mutual funds have a back-end sales load known as a "contingent deferred sales load." Like a surrender charge for a variable annuity, the amount of this type of load will depend on how long the shares are held, and it typically decreases to zero if the investor holds the shares long enough. The rate at which this fee will decline is disclosed in the fund's prospectus.

13. A redemption fee is another type of fee that some funds charge their shareholders when the shareholders redeem their shares. Unlike a sales load, a redemption fee is typically used to defray fund costs associated with a shareholder's redemption and is paid directly to the fund, not to a broker. The SEC generally limits redemption fees to 2%. https://www.fidelity.com/mutual-funds/overview

14. The question of whether you must pay a penalty or other fee for switching among investment choices in your plan is different from whether you must pay a penalty for taking money out of your 403(b). You’ll usually have to pay a tax penalty for early (pre-retirement) withdrawals from tax-deferred retirement plans, so before you take money out of your 403(b) account, be sure to consult with a tax adviser.

15. What annual fees will I pay? Fees and expenses vary from product to product — and they can take a huge bite out of your returns. An investment with high costs must perform better than a low-cost investment to generate the same returns for you. Even small differences in fees can mean large differences in returns over time. For mutual funds and variable annuities, you can find information on costs and fees in the prospectuses. For fixed annuities, check the sales literature or the contract.

16. Employee Stock Ownership Plans (ESOPs) An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock to the plan for the benefit of the company’s employees. This type of plan should not be confused with employee stock option plans, which give employees the right to buy their company’s stock at a set price after a certain period of time.

17. Traditional and Roth 401(k) Plans Individuals who want to save for retirement may have the option to invest in a 401(k) or Roth 401(k) plan. Both plans are named for the section of the U.S. income tax code that created them. Both plans offer tax advantages, either now or in the future. With a traditional 401(k), you defer income taxes on contributions and earnings. With a Roth 401(k), your contributions are made after taxes and the tax benefit comes later: your earnings may be withdrawn tax-free in retirement.

18. Traditional 401(k) Plans A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options. Employee contributions to a 401(k) plan and any earnings from the investments are tax-deferred. You pay the taxes on contributions and earnings when the savings are withdrawn. As a benefit to employees, some employers will match a portion of an employee’s 401(k) contributions. Income taxes on matching funds also are deferred until savings are withdrawn.

19. Roth 401(k) Plans An employer-sponsored Roth 401(k) plan is similar to a traditional plan with one major exception. Contributions by employees are not tax-deferred but are made with after-tax dollars. Income earned on the account, from interest, dividends, or capital gains, is tax-free.

20. 401(k) and Roth 401(k) Rules and Regulations The Securities and Exchange Commission does not regulate or oversee retirement plans such as pensions or 401(k) plans.

21. 401(k) retirement plans can make the difference between a financially secure retirement and the specter of running out of money. These plans offer tax benefits and the opportunity for your savings to compound over time. So it's important to understand every aspect of how your 401(k) plan works, whether you're just getting started or you're already retired.

22. Some employers offer defined benefit plans, which promise you a specific income, called a pension, after you retire, typically based on the number of years you work at the job and what you earn.

23. Salary Deferral Plans If the defined contribution plan your employer offers is a salary deferral plan, you can put part of your earnings into a retirement savings account. Your employer may contribute to your account as well. The best-known salary deferral plans are 401(k) plans.

24. You are responsible for deciding how to invest the money that accumulates in your account. Usually you must choose among a list of investments the plan offers. When you participate in a traditional 401(k) plan, the taxable salary that your employer reports to the IRS is reduced by the amount that you defer to your account. This means income taxes on that money are postponed until you withdraw from your account, usually after you retire.

25. If you participate in a Roth 401(k), though, the amount you defer doesn't reduce your taxable income or your current income taxes. But when you withdraw after you retire, the amounts you take out are tax-free, provided you're at least 59½ and your account has been open at least five years.

26. Tax Benefits Any earnings your tax-deferred contributions produce during the time they remain in your account are also tax deferred. And no matter how many times you sell investments that have increased in value, you won't owe capital gains tax on any profit you may make. Of course, if you sell investments that have lost value, you can’t claim your capital losses either.

27. The tax you eventually pay depends on your income tax rate at the time of the withdrawal. For example, if your combined taxable income including the withdrawal puts you in the 28 percent federal tax bracket, the tax you owe will be figured at that rate. Although there’s no way of predicting what your income tax rate will be when you withdraw from your account, many people have less income in retirement than they did when they were working, and so pay tax at a lower rate.

28. Vesting Any money you contribute to a salary deferral plan and the earnings those contributions produce always belong to you—though you usually must change jobs or retire to withdraw or move the balance. In contrast, you don't have a right to the money your employer contributes to your account (or the earnings made from those contributions), or makes to any other retirement account for you, until you are fully vested, or have full legal rights to your account. Vesting is determined by time on the job.

29. Federal regulations set guidelines for vesting, but your employer determines which of the vesting schedules to use. You may be vested though one of three schedules: immediate, graded or cliff. Cliff vesting grants you the right to 100 percent of your account as soon as you work a certain number of years. That access must be granted within three years of your employment if your employer has made matching contributions to a 401(k) or similar plan. Graded vesting grants you the right to your account in increments over time.

30. Types of Retirement Plans The salary deferral plan that's available to you will depend on where you work. Publicly and privately held corporations typically offer 401(k) plans. Nonprofit organizations, such as schools and colleges, hospitals and museums, usually offer 403(b) plans, but may offer 401(k)s. Many state and local governments offer 457 plans, and the federal government offers a thrift savings plans.

31. 401(k) Plans Each plan has a sponsor, usually your employer. The sponsor decides which factors determine your eligibility, what percentage of your salary you can contribute to your plan, whether to match your contributions and which investments will be available within your plan. The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and record-keeping services. http://webapps.dol.gov/dolfaq/go-dol-faq.asp?faqid=225

32. Roth 401(K) • An increasing number of employers are offering employees a relatively new 401(k) choice—a Roth 401(k). • Both the traditional 401(k) and Roth 401(k) offer tax advantages when you defer a portion of your salary into an account in your employer’s retirement savings plan. • Both feature tax-deferred compounding of contributions that are made to the account. Both have no income limits and require minimum distributions after you turn 70½ in most cases, and both can be rolled over to an IRA when you retire or leave your job for any reason.

33. 401 (K) • Contributions Come from pre-tax income, reducing gross income reported to IRS • Withdrawals Taxed at your ordinary income tax rate

34. Roth 401(K) Contributions Come from taxable income, not reducing gross income reported to IRS Withdrawals Tax-free provided account is open at least five years and you are at least 59½

35. 403(b) Nonprofit organizations, educational institutions, religious institutions and certain hospitals may offer 403(b) plans, also known as tax-sheltered annuities (TSAs) or tax-deferred annuities (TDAs). In a 403(b) your investment menu is limited to annuities—fixed or variable and in some cases equity-indexed annuities (EIAs)—or mutual funds.

36. 457 Plans State and local governments typically offer 457 plans, also called deferred compensation plans.

37. Getting Started Before you can participate in your employer's 401(k) plan, you have to meet the plan's eligibility requirements. It's also a good idea to familiarize yourself with the contribution limits and matching benefits your employer might offer before you sign up.

38. Before you can participate in your employer's 401(k) plan, you have to meet the plan's eligibility requirements. It's also a good idea to familiarize yourself with the contribution limits and matching benefits your employer might offer before you sign up. With many employers, you have to sign up before you can contribute part of your earnings to your plan account. You have to choose how much to put away. And you must decide where to invest your contributions, selecting among the investment choices offered in the plan.

39. Why Participate? Suppose you contribute $300 per month to your traditional 401(k) and earn an average annual 8 percent rate of return. If you participate for 20 years, the account could be worth $178,184. But if you had started 10 years earlier and contributed at the same rate for 30 years, your account could be worth $450,388.

40. Eligibility Your employer can impose two restrictions: that you must work for a full year—usually at least 1,000 hours over 12 months—and be at least 21 years old before you enroll. But not all employers make you wait. One of the questions you'll want to ask when you're considering a new job is when you'll be eligible to contribute to a 401(k).

41. How Contributions Work When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage of your gross pay or a specific dollar amount each pay period and put it into an account that’s been set up in your name. You can raise or lower your contribution rate as often as your employer allows.

42. Contribution Limits You can't contribute more than the percentage of your pay that your employer lets you add to a 401(k) each year. Typically, that cap is 10 percent or 15 percent of your gross income.

43. http://www.pbs.org/wgbh/pages/frontline/retirement/