Anyone who is saving for retirement needs to pay attention to the retirement plan contribution limits. There are two reasons this is important – you want to contribute as much as you can to reach your goals, but you also don’t want to contribute too much, because that can trigger possible penalties. The IRS reviews retirement plan contribution limits each year, and this year they made a few changes and increased the maximum contribution levels of several retirement plans for 2013. The big changes came to employee sponsored deferral programs such as the Thrift Savings Plan and the 401(k) plan – and similar plans such as the 403b, 457, 401a Plans. Let’s take a look at some of the details you need to know.

Types of Retirement Plans

There are many plans to choose from.

There are many different retirement accounts available to workers, and they can be broken down into three major types: employer-sponsored, individual, and self-employed/small business. Let’s take a look at some of the different types of plans and their contribution limits. One note before we start – this is a simplified version of the types of retirement plans out available to most people. This does not include traditional pension plans such as those provided by the military retirement system, the government, or companies in the private sector.

Employer-sponsored retirement plans. If you are in the military or work in the civil service, you are most likely eligible for the Thrift Savings Plan, or TSP. For the most part, the Thrift Savings Plan functions just like a 401k plan, which is a more common retirement plan in the civilian sector. Similar retirement plans include the 403b (common in non-profit sectors), 457, and 401a plans. These numbers might seem confusing at first, but don’t put much into their names – they simply refer to a chapter of the tax code.

Individual retirement plans including the popular Roth and Traditional IRAs. These plans are one of the best ways to save for retirement, whether you have access to an employer sponsored retirement plan or not. In fact, you can invest in both of these types of plans without having to worry about exceeding your retirement plan contribution limits. This is because these plans are not in the same classification.

Self-employed retirement plans or small business retirement plans. There are a variety of retirement plans that are only open to small businesses and those who are self-employed. One of the most popular is the Solo-401k, which has the same limits as the 401k plan you would find in the commercial sector, with one major addition: small business owners can defer a portion of their business income as a tax-free contribution. Other examples include SEP IRAs, SIMPLE IRAs, and Keough Plans. The IRS has a good rundown here.

2013 Retirement Plan Contribution Limits

The new limits are good for the 2013 tax year. Future retirement plan contribution limits will be pegged to inflation levels and raised in $500 increments. Here are the contribution limits for the various types of retirement plans:

Employer sponsored retirement plans: 401k, 403b, 457, 401a, and Thrift Savings Plan:

• $17,500 (under age 50); $23,000 (over age 50); Total max contribution (including employer matching, bonuses, etc.) $51,000.
• More information about – 401(k) contribution limits, and Thrift Savings Plan contribution limits.

Individual Retirement Arrangements (IRAs):

• $5,500 (under age 50); $6,500 (over age 50)
  
• Roth and Traditional IRA contribution limits: $5,500 (under age 50); $6,500 (over age 50)

Self-Employed and Small Business Plans:

• SIMPLE IRA Plan – $12,000 in salary contributions and either a 2% fixed contribution or a 3% matching contribution.
• Simplified Employee Pension (SEP) – Up to 25% of your net earnings from self-employment, up to $51,000.
• Solo 401k – Salary deferrals up to $17,500 (under age 50); $23,000 (over age 50); Contribute up to an additional 25% of your net earnings from self-employment, up to $51,000.

It is recommended to get tax assistance if you have a self-employed retirement plan to ensure you choose the best retirement plan for your situation.

Don’t Exceed Retirement Plan Contribution Limits!

It’s also important to note that some of these plans share contribution limits. For example, the Solo 401k plan shares a contribution limit with the employer-sponsored plans listed above. For example, if your are under age 50, you would only be able to contribute $17,500 in 2013. Let’s say you are a military member who contributes to the Thrift Savings Plan and you also have a small business on the side and have a Solo 401k. The most you can contribute from your salary across both accounts is $17,500. The shared limit only applies to the employee deferral contribution (from your payroll), and the max limit of $51,000. You could contribute additional money to each account if you have bonuses or profit sharing. If you have questions, always consult a tax professional.

Traditional and Roth IRAs also share a contribution limit with each other. The limit for 2013 is $5,500 across both accounts if you are under age 50. You can contribute all to one account , or split it between them. It doesn’t matter as long as you don’t exceed the limit.

Contribute as much as you can now

It’s best to contribute as much as you can contribute to your retirement accounts because that gives your money more time to grow via compound interest. If the current markets make you nervous, then consider placing your money in a high interest money market account or a CD until you feel more comfortable investing the money in equities. Most retirement accounts have a cash fund or cash equivalent, which leaves you no excuse not to start investing now!

The military retirement system is one of the most loved – and valuable – benefits available to military members. It is unique in many ways, and one of the few retirement plans in the US which starts paying beneficiaries immediately upon retirement without a standard waiting period or age limit.

Unfortunately, it is also a target by cost-conscious members of the government who are looking for ways to decrease the military budget and cut costs over the next few decades. Because of the high cost of the military retirement system, the Defense Business Board which was tasked with studying the military retirement system and making recommendations on how the government can save money on the military retirement system in the coming decades.

The basic conclusion by the Defense Business Board, found in this pdf entitled, Modernizing the Military Retirement System, was that the current military retirement system is “unfair, unaffordable, and inflexible.”

What follows is the slideshow prepared by the Defense Business Board, containing their recommendations and how they would affect the military. Afterward, we give our take on the proposed changes:

Proposed Changes to Military Retirement Benefits

The current military retirement system – why it’s good for members and why it might change. In the current system, active duty servicemembers who retire after 20 years can expect to begin receiving their pension almost immediately and the payments will not only continue through the remainder of their lives, but will also increase based on Cost of Living Adjustments (COLA). A military retirement is worth millions over the course of a lifetime. While military retirement benefits may not be enough to live on for everyone, the system is a fairly generous program, and one that is hard earned by its recipients.

The problem with the military retirement system, according to the government, is that it is becoming increasingly more expensive and potentially unsustainable in the long run, especially when factoring in the full health care coverage given to military retirees and their family members. TRICARE has its critics, but overall, it is a very affordable insurance program which is basically unmatched in the civilian sector.

All of this leads us to cost: the government has been seeking out ways to reduce the overall cost of the military retirement system, which, if left unchanged, will spiral out of control in the coming decades. Here are some of the main notes from the study, which support the need for change:

• The military retirement system has not materially changed for over 100 years
• The current military retirement system was designed for an era when life spans were shorter
• Pay was not competitive with civilian pay
• Second careers were rare since military skills did not transition easily to the private sector

These additional reasons were given to support a new military retirement system:

• DoD pays retirees 40 years of retirement benefits for 20 years of service
• Military skills are transferable to the private sector
• Second careers are now common for those retiring in their 40s

What follows are a couple of recent recommendations which have been making headway.

Defense Business Board Recommendations:

Please keep in mind these are only proposed changes by the Defense Business Board, and have not yet been put before Congress or the President and have not been voted on for becoming part of law.

• Convert military retirement to a civilian-style retirement system similar to a 401k plan; retirement pay wouldn’t be paid until age 60-65 (or Social Security age)
• Retirement benefits would vest after 3-5 years of service
• Authorize “gate pays” and separation pay to encourage separation from active duty or to continue service on active duty

Let’s take a look at each of these and how they might affect military members.

Military Retirement Changes: Defined Benefit Plan

Perhaps the biggest proposed change is moving away from the traditional pension style system to a defined benefit plan, similar to a civilian 401k plan. In this proposed system, military members would receive a mandatory Thrift Savings Plan account into which annual contributions would be made by their member service (the average DoD contribution was listed at 16.5% of annual pay).

There are several versions of the defined benefit plan discussed, with vesting starting as soon as 3-5 years of active duty service. These plans would also be portable into the civilian sector and back into military service if there is a break in service.

Individual members would have the ability to contribute “gate pays” or additional funds to their account and each service would be able to contribute additional funds to members based on high deployment schedules, hardship, troops who are at risk, for bonuses and as a retention tool, and for other reasons as each service sees fit.

What this proposed plan is – and isn’t. Basically, this proposed plan is what you would find at many companies in corporate America – a 401k plan with matching benefits which would vest after serving a few years with the company. After your defined benefit plan vests, you could take it with you when you go to another company. What this plan is not, is a pension plan, which pays servicemembers a defined benefit at a specific time.

Will Current Servicemembers Be Grandfathered in?

The proposal by the Defense Business Board did not plan on changing any benefits to current retirees. So if you have already retired, then your benefits probably won’t be touched, at least by this set of proposals.

But there were two different scenarios given regarding how these proposed changes would be implemented for current military members – a low cost proposal and a high cost proposal – low cost meaning low cost to the government, and high cost meaning high cost to the government. Let’s take a look at both options.

The low cost proposal would go into effect as soon as it was voted into law and would affect current military members on a graduated basis. For example, if you had already served 20 years, you would be grandfathered into the old system and would receive your pension benefits under that plan. If you had had fewer than 20 years of service, you would get a combination of the old retirement plan (the pension, or annuity) and the new plan (the 401k style plan). To receive the pension, military members would still be required to serve 20 years. Here is how the “low cost” proposal would affect current servicemembers.

• 20 years of service or more, no change
• 15+ years of service, 37.5% of base pay in a pension plan, and the rest under the 401k-style plan.
• 10 years of service, 25% of base pay, and the rest under the 401k-style plan.
• 5 years of service, 12.5%, and the rest under the 401k-style plan.
• New recruits, new retirement system.

The high cost proposal would mean that everyone currently in the military would continue to be under the current retirement system and could receive their normal pension after they reach 20 years of service or more. The new retirement system would only affect servicemembers who join active duty after the new retirement system is voted into law and takes effect.

Will a New Military Retirement System be Voted into Law?

Right now it’s too early to tell. This is only one recommendation for change and it has been sent back to be studied further and will be presented again in February of 2012. Though we don’t know what will happen, we can say two things for certain:

1. Something will need to change with the military retirement system.
2. It will be fought tooth and nail by military interest groups.

1. The numbers don’t lie. Like the Social Security System and Medicare, the military retirement system is quickly growing out of control. Changes need to be made – how or when, I don’t know. But I would hope that the government would find a middle ground between the current retirement system and any proposed changes.

2. Any changes to the military retirement system will be highly contested by military and veteran organizations. And rightly so. Military servicemembers put their lives at risk and make more physical and emotional sacrifices than the average office worker who earns a 401k and a pat on the back. The military retirement system is just one manner in which military members are rewarded for their sacrifices.

I also don’t believe the changes should affect anyone who is 1) already receiving military retirement benefits, or 2) already serving with the understanding that they are eligible for benefits under the current retirement system. Taking away benefits from someone after they had earned them or made life changing decisions based on what they would receive is not the way to take care of the people who protect our freedom.

What are your thoughts on these proposed changes to the military retirement system?

photo credit: USAF

Planning for retirement can be difficult, whether you are retiring from a military position,civilian position, or a combination of both. However, career military members may have an added benefit most civilian sector employees do not – the opportunity for two retirements: one from the military and one from the civilian workforce. This dual retirement option provides veterans with a unique situation when determining how to save for retirement. The following tips can help military veterans adequately save for retirement from their military and/or civilian careers:

Determine Your Retirement Income Needs

Trying to figure out your annual income needs when you will be 65 years old can be challenging when your retirement date is still several decades away. You have to factor in your future lifestyle requirements, rising TRICARE costs and other rising health expenses,  inflation, and various other factors.  Even though you might not be able to get an exact number, you can still come up with a rough idea that can act as a saving guide. Here is one method to manually determine how much you need for retirement:

Determine future income needs. If you plan on having a similar quality of life in retirement as you have now, then start by using your current income requirements, then adjust for inflation. Let’s look at an example and you can adjust these numbers based on your income and requirements (and don’t worry about knowing how to do the math, you can just copy and paste the equation into Google’s search engine and Google’s calculator will give you the results quickly and easily). You can also use a hassle-free site, such as RetirementCalculator.com, to run some basic retirement planning calculations.

Assumptions: Today’s income requirement is $45,000 per year (median US Income is roughly $45,000), inflation will be 3%, and you have 25 years before retirement. You can use the following equation to adjust for inflation:

Inflation Adjusted Income Requirement = Today’s required income * ((1 + inflation rate)^ Number of years to retirement)

Inflation Adjusted Income Requirement =$45,000 * (1.030 ^ 25)

Inflation Adjusted Income Requirement = $95,000 (rounded up)

Next, account for future retirement income. Using the assumptions above, you will need approximately $95,000 per year in retirement to maintain the same standard of living in 25 years as you enjoy now. But that doesn’t mean you need to save enough money to withdraw $95,000 per year from your retirement accounts. You also need to account for your retirement income, such as Social Security benefits and your military or private pension(s). Be sure to take into account what these benefits might be worth in the future, not the present day value. Again, we are dealing with a 25 year time frame, so use your best estimate.

Once you have this number, subtract it from your annual living requirement of $95,000. For example, if you anticipate your military pension and Social Security Benefits to be worth $50,000 per year, you will need to come up with an additional $45,000 per year, not the full $95,000. Also keep in mind that you can increase your social security requirements if you wait longer to begin receiving benefits.

Account for additional retirement accounts and investments. Many people have other retirement accounts such as an IRA, Thrift Savings Plan, or 401k. This money will also work toward your retirement and should be accounted for when you make your retirement calculations. Additionally, be sure to keep in mind any other investments you may have, such as rental properties and other investments held in taxable investment accounts.

Determine your remaining retirement income needs. Once you have a good idea of how much you will earn from your pensions, retirement accounts, and other investments, you can subtract these numbers from your annual income requirements to get a better idea of how much more money you need to save for retirement. This will be your savings goal.

Start Retirement Planning Early

The earlier you begin planning for retirement, the better. In fact, military members should start retirement planning early, since a military pension might not be enough money for retirement by itself. Military members have access to the Thrift Savings Plan (TSP), which is similar to a civilian 401(k) plan. Like a 401(k) plan, the TSP offers military members a way to make tax-deferred investments. A Roth version of the TSP is scheduled to roll out in 2012, giving military members another retirement account option. TSP members can make withdrawals from their TSP during retirement, or they can roll their TSP into an IRA when they retire or otherwise separate from the military. This gives TSP members more long term flexibility in managing their investments.

Maximize Post-Military Employment and Investments

Many military members are eligible to start earning a military pension in their late 30′s or early 40′s, which is young enough to begin a post-military career. In some cases, veterans are able to earn enough service time to gain another pension from a private company or from a different government organization. The possibility of dual pension plan incomes, in addition to Social Security Benefits, can greatly increase your quality of life in retirement and potentially allow to to retire more quickly than you anticipated.

Even if you aren’t able to receive another pension from your post-military employment, you can do your best to increase your savings in retirement accounts such as the TSP if you remain in government service, or through an IRA or 401k. Contributing as much as you can to these retirement accounts will help provide you with the retirement income you need to maintain a nice quality of life in your retirement years.

Finally, Take Advantage of All Benefits Available to You

There are a variety of state and federal benefits available to veterans, including health care, base and commissary privileges, educational benefits, homestead exemptions, and more. It is recommended to meet with a veteran benefits advisor in your local area who can help you better understand which benefits might be available to you, and to help you better understand how to qualify and apply for those specific benefits.

*A few notes: This article covers a few basic assumptions and should only act as a rough guide for do-it-yourself investors. It is highly recommended that you meet with a professional financial planner before making the final decision to retire. If you are younger you might find it helpful to meet with a financial planner every few years to ensure your retirement plan is on track.

Tax season is a great reminder to make retirement account contributions if you don’t do it throughout the year. The good news is that tax laws are written so that you can make contributions for the previous tax year until the tax filing deadline. Even though the calendar year may be over and done with, you can still contribute to your IRA until the tax deadline, which is April 15, in most years. Just take note that if you make IRA contributions between January 2 and April 15th, you may need to specify which tax year you are contributing to because you can also contribute to the current year IRA during these dates.

Traditional IRA and Roth IRA. There are two main types of IRA accounts available to most people – they are the Traditional and Roth IRA. The short and quick explanation is that Traditional IRA contributions are made with pre-tax money, the investments grow tax free, and the money is taxed upon withdrawal. Roth IRA contributions are made with money that has already been taxed. It grows without the drag of taxes and is withdrawn without any additional taxation. There are certain income limits and other rules involved with regarding deductions and eligibility.

Traditional and Roth IRA Contribution Limits

The maximum you can currently invest in a Traditional or Roth IRA is $5,000 if you are under age 50. Those who are age 50 and older are eligible for catch-up contribution of $1,000 and can contribute up to $6,000.

It is important to note that you can only contribute up to the maximum limit across all individual IRA accounts (self-employed retirement plans may have different rules). I am under 50 years old, so I would be able to contribute any combination of $5,000 between any IRAs I decide to open. For example – $2,500 in a Traditional and a $2,500 Roth IRA, or $3,000 in a Roth IRA + $2,000 in a Traditional IRA, etc. so long as it does not exceed $5,000.

Traditional IRA Deductibility and Roth IRA contribution phase out levels

Your ability to make a tax deductible Traditional IRA contribution and Roth IRA qualifications are based on your  modified adjusted gross income (MAGI), which is calculated on your tax form.

Roth IRA phase out. The IRS has specific income restrictions regarding who can contribute to Roth IRAs. The income limits are based on your Roth IRA eligibility begins phasing out for single filers with a MAGI above $105,000, and for married filing jointly above $167,000. Single filers with a MAGI above $120,000 and married filing jointly with a MAGI above $176,000 are not eligible for Roth IRA contributions. See Roth IRA rules, or IRS pub 590 for more information.

Traditional IRA deduction phase out. The Traditional IRA phase out schedule determines whether or not you can deduct your contributions against your taxes. The phase out for Traditional IRA deductions for single filers begins at $55,000 and ends at $65,000. The range for married filing jointly is between $89,000 and $109,000. It is important to note that tax filers with income limits above the deduction levels can still contribute to a Traditional IRA, however, they will not be able to deduct it against their taxes.

Did you contribute too much to your IRA? The deduction and phase out limits may affect your ability to make contributions. Find out what happens if you contribute too much to an IRA.

More information about IRAs

Individual Retirement Arrangements (IRAs) are great investment vehicles, and I highly recommend investing in one if you are able to do so. The benefits you receive from the tax deferrals are a great way to grow your investments without the drag of taxes slowing you down your investments.

Max out your IRAs if possible. It is important to max out IRA investment if possible because you only have one opportunity to do so. Once the window of eligibility closes, it is closed for good.

Compare IRA Providers. If you are looking for another place to compare IRA plans, then visit the Mint.com IRA Center for more insight into different IRA plans. Click here to get started.

An Individual Retirement Arrangement, or IRA, is one of my favorite vehicles to save for retirement because it offers a wide variety of investment choices and lots of tax savings. But when you don’t follow the rules, an IRA comes with hefty penalties. A common mistake is contributing too much to an IRA.

What Happens If You Contribute Too Much to an IRA?

In this article you’ll learn about traditional and Roth IRA contribution limits, IRA contribution deadlines, and how to correct an excess IRA contribution so it costs you as little as possible. (If you’re interested in learning more about all the different types of retirement accounts that can help you accumulate an impressive nest egg, be sure to read my new book, Money Girl’s Smart Moves to Grow Rich.)

When Is the IRA Contribution Deadline?

The deadline to contribute funds to an IRA for the 2010 tax year is April 18 of 2011. So if you didn’t max out an IRA last year, there’s still time to contribute more money for 2010! The maximum allowable contribution for a traditional or Roth IRA is $5,000 if you’re under age 50 and $6,000 if you’re age 50 or older. If you have more than one IRA, you can contribute to both of them as long as the total amount doesn’t exceed your allowable limit. For example, you could contribute $2,500 to a traditional IRA and $2,500 to a Roth IRA.

What are the Income Limits for Roth IRA Contributions?

If you contribute to a Roth IRA and end up making more money than you expect, you might have to withdraw all your contributions. That’s because contributions to a Roth IRA are allowed only if your modified adjusted gross income doesn’t exceed the following IRA contribution limits:

• $120,000 for taxpayers who file as Single, Head of Household, or Married Filing Separately (if you didn’t live with your spouse during the year)
• $10,000 for taxpayers who file as Married Filing Separately (if you did live with your spouse during the year)
• $177,000 for taxpayers who are Qualifying Widow(er)s or Married Filing Jointly

What If You Contribute Too Much?

But what happens if you overloaded an IRA by mistake? It’s not uncommon for people to realize at the end of the year that they contributed more than their allowable limit. The good news is that excess contributions can be corrected without penalty if handled in a timely manner.

Let’s say Polly is 30 years old, earned $40,000 in 2010, and contributed a total of $6,000 to her traditional IRA. Since her allowable limit is only $5,000, she has an excess of $1,000 in the account. If Polly withdraws the excess plus any earnings it made, on or before the due date of her tax return, it’s like it never happened!

If she can’t complete the necessary paperwork for an IRA withdrawal before taxes are due, she can file for a tax extension using Form 4868, Application for Automatic Extension of Time. Filing for an extension will give Polly until October 17, 2011 to file—plenty of time to correct her IRA goof.

How to Correct an IRA Contribution Mistake

I mentioned that Polly has to withdraw both her excess contribution and the earnings it made. The excess contribution can be withdrawn without any tax or penalty, but that’s not the case for income she made on the excess. Let’s say she made $50 on the additional contribution of $1,000. Because she wasn’t supposed to earn that additional money, withdrawing it is considered an early distribution.

Distributions you take from an IRA before you reach age 59½ are subject to a hefty 10% penalty. So Polly has to make things right with the IRS by paying ordinary income tax plus the 10% penalty on the $50 she made from her excess contribution of $1,000.

What Happens If Excess IRA Contributions Are Not Corrected?

Once you realize that you contributed too much to an IRA, contact your IRA custodian or tax professional right away. An excess contribution that isn’t withdrawn by the deadline is subject to a 6% tax penalty each year that it remains in your IRA. It’s important to try to prevent excess IRA contributions from occurring in the first place, but it’s even more important to get them corrected on time to avoid significant taxes and penalties.

The maximum amount of money you can sock away in a Roth IRA is $5,000 each year if you are under the age of 50 years-old. If you saved the $5,000 contribution limits every year from the time you graduated college until you retired at the ripe old age of 65, you would be sitting on a nest egg of approximately $1.6 million assuming an 8% annual rate of return. But, for a lot of us, especially those just starting out, $5,000 per year seems a little daunting. So, I thought it might be fun to help you find the money. You already have it. You are already spending it. To break it down a little bit, $5,000 per year equals $415 per month. $415 is approximately $104 per week. Do you realize that $5,000 is $13.70 per day? You need to find $13.70 every day to arrive at the magic number of $5,000 per year to invest in a Roth IRA. It can be done. Here’s how…

Five Quick and Easy Ways To Find $13.70 Per Day

1. Do Not Eat Out For Lunch – Even eating at McDonald’s costs an average of over $5 per meal, and if you go out to a finer establishment, the bill could be even higher. If you do that every day, the cost out of your pocket can really skyrocket. And, many junior enlisted members are already having money taken out of their paychecks because it is assumed by the government that they are eating in the dining facilities provided on the base for lunch. Eat there. Many of you have already “paid” for it.
2. Curb The Partying – For many young Soldiers and members of the military, going out on the town is a way of life. But, if you are going out every Friday and Saturday night, the costs of getting into the clubs and drinks could quickly add up over the course of the month.
3. Cut Back On The Energy Drinks – Military members work some crazy hours, and they love their energy drinks. But, energy drinks are almost as expensive as a fancy cappuccino and it only gets worse if you drink several over the course of a day.
4. Reduce The Amount You Smoke – Assuming that a pack of smokes costs $4, a pack a day habit can cost you over $120 each month.  The price is much higher in many parts of the country. Reducing the amount you smoke will save you hundreds per month, over a thousand per year, and thousands over your lifetime – not to mention the health benefits.
5. Brew Your Own Coffee – This tip is every financial planner’s favorite since David Bach made it famous in his classic book, The Automatic Millionaire. But, the average cost of a cup of coffee in a fancy coffee house can run you about $5 now. If you buy one on the way to work every morning or during the middle of the day, you can spend over $25 per week. Brew your own at home for as little as $0.50 per pot.

You don’t even have to do all of these things at the same time. You just have to get to that magic number of $415 per month. Simply cutting back on a few of these things can get you to that magic number.

Why Is It So Important?

Time is the most important thing that you have on your side when you are young. $5,000 invested each year starting when you are 22 years-old until you retire from the military at age 42 would be worth over $228,000, assuming an 8% annual rate of return. If you continued to max out your Roth IRA after leaving the military service until you reached the retirement age of 65, your $5,000 per year could grow to $1.64 million thanks to the power of compounding interest. Can you really not find that extra $415 a month now if it would earn you $1.6 million? Is your daily pack of cigarettes or morning coffee really worth that?

Too many young people make excuses as to why they cannot invest money for their retirement. They do not see the immediate return, and so they forgo their financial future for instant gratification. I am not advocating living a recluse’s live holed up in your barracks eating ramen noodles. But, I do think that there are quite a few simple opportunities for young investors to control their spending in order to save $13.70 per day which translates into that magic $415 per month or $5,000 per year and use that money to start a Roth IRA. What would you do with $1.6 million dollars in retirement? Do you know that an immediate annuity of $1.6 million dollars could pay you almost $80,000 per year or more for the rest of your life?

Opening an Roth IRA is easy, but you have to meet certain requirements in order to eligible for a Roth IRA. For example, you must have earned income, meet specified income limits, contribution deadlines, and open your IRA through an approved IRA custodian, generally a financial institution such as a bank or brokerage firm, or through an authorized IRA custodian (many independent financial advisors meet this qualification). There are many Roth IRA rules to follow – so let’s take a look and see if you are qualified to open a Roth IRA.

Earned Income Requirements for Roth IRA Contributions

Earned income generally includes all income from your salary, wages, services provided, professional fees, tips, commissions, profit sharing, and bonuses. Forms of income that don’t qualify as earned income include interest, dividends, royalties, rental income, capital gains, disability, social security income, or income from annuities. The general rule is that if you worked to generate the income, it qualifies as earned income; income that you receive which doesn’t require work often doesn’t count as earned income.

There is an exception to this rule for military members. Many military members earn tax free combat pay while deployed. This income is not generally considered earned income because it is tax free. However, the HEROES Act allows military members to contribute to an IRA even if they have no earned income due to tax free pay.

• Find out why military members should open Roth IRAs.
• Read more about investing while deployed.

Income Limits for Roth IRA Contributions

In addition to meeting the requirement of having earned income, you must qualify for the income limits. If you earn above a certain threshold, then you will not be eligible to contribute directly to a Roth IRA. However, you may be able to do a Roth IRA conversion, which is where you first contribute to a traditional or non-deductible IRA, then convert it to a Roth IRA. Here is more information about Roth IRA conversions.

Income limits are based on the Modified Adjusted Gross Income (MAGI), which is found on your IRS Form 1040. Roth IRA income limits are as follows:

• Income limit phase out begins at $105,000 and ends at $120,000 for individuals filing as single, head of household, or married filing separately.
• Income limit phase out begins at $166,000 and ends at$176,000 for married individuals that file joint taxes.

What is a phase out? That means the tax payer is only able to contribute a portion of the maximum contribution at the beginning of the phaseout, then nothing once they reach the income limit.

Contribution Limits and Deadlines

Contribution Limits. If you are under age 50, you can contribute$5,000 to your Roth IRA, and persons age 50 and over can make a catch-up contribution of an additional $1,000, for a total of $6,000. This is an annual limit and you cannot make up for lost time and make additional contributions if you didn’t make them in previous years.

Contribution deadlines. The contribution deadline for Roth IRAs is the same as the tax filing deadline, April 15th. You can contribute to a Roth IRA as soon as the calendar year changes, and you have until April 15th of the following year (or perhaps a day or two later if the tax deadline falls on a weekend or national holiday). You can not extend the IRA contribution deadline if you need to file a tax extension.

Open Roth IRA at an Approved Institution

The final element to qualifying for a Roth IRA is to open it at an approved financial institution. Basically, the IRS offers special tax benefits for opening a Roth IRA and they want to ensure they are properly coded, managed, and tracked for tax reasons. So you aren’t able to open it and keep it in your home. But the good news is that you can open a Roth IRA in many locations. For example, many brokerages, banks, credit unions, savings and loan associations, financial planners and most FDIC insured financial institutions qualify as an IRS-approved financial institution. The forms are easy to fill out and you can literally open an IRA in 10-15 minutes if you already have an account with the financial institution in place – if you don’t have an account you can add another 15 minutes to the process. Here are some top Roth IRA companies.

Compare IRA Providers. If you are looking for another place to compare IRA plans, then visit the Mint.com IRA Center for more insight into different IRA plans. Click here to get started.

What to do if You Don’t Qualify for a Roth IRA

If you don’t qualify for a Roth IRA you may still be eligible to contribute to another IRA, then later convert it to a Roth IRA. For example, if you meet all of the Roth IRA qualifications with the exception of the income limits, then you may be able to contribute to a non-deductible IRA, which is a Traditional IRA that isn’t tax deductible. Then you can convert your Roth IRA and re-characterize your non-deductible IRA as a Roth IRA. Just keep in mind there may be some requirements, such as accounting for any gains.

The IRS offers some pretty awesome tax benefits for people who invest in retirement funds. To entice people to save for their own retirement, the IRS offers people the opportunity to contribute to 401k plans, IRAs, the Thrift Savings Plan, and other retirement plans and defer paying taxes on a portion of their contributions or withdrawals.

But these tax benefits come with a catch. Almost all retirement accounts have early withdrawal penalties of 10% if you take your money out before you reach the qualified retirement age of 59.5 years old.  In addition, distributions from Traditional IRAs, 401(k) plans, TSP, and most other retirement plans are considered taxable income and will be included as income the year you withdraw the money, meaning you will pay taxes on those withdrawals.

10% Early Withdrawal Penalty for Retirement Accounts

Tax Consequences of Early Withdrawals from Retirement Accounts

When you withdraw money from a retirement plan (including IRAs, 401(k) plans, Thrift Savings Plan, 403(b) plans, etc.) before you reach the age of 59.5, you’ll be hit with the early withdrawal penalty of 10%.  You may also be hit with a 10% penalty if you withdraw money from a Roth IRA within five years of opening the account.

As mentioned above, withdrawals, or distributions, from many retirement accounts are classified as taxable income. Taxes on this income will apply on top of the 10% penalty so that you are paying 10% of the total amount withdrawn on top of the income tax you pay on the total amount withdrawn.  In some situations, you may be able to avoid the 10% penalty, but you cannot avoid having to count early withdrawals from retirement accounts as taxable income.

If you have a SIMPLE IRA that you only began contributing to within two years, a 25% early withdrawal penalty may be applied instead of 10%.

Exceptions to 10% Early Withdrawal Penalties

There are a few situations with allow individuals to take early distributions from their retirement accounts without having to pay a 10% penalty. If you have an individual retirement account (either a Traditional or Roth IRA), the following are allowed exceptions for early withdrawal of your retirement account without having to pay a 10% penalty:

• Completing a direct rollover to your new retirement account
• You become permanently or completely disabled
• You became unemployed and used money from a retirement account for health insurance premiums
• You use the money for your own college expenses or the college expenses of your dependent(s)
• You pay for medical expenses that cost more than 7.5% of adjusted gross income
• The IRS withdrew the money as a tax levy to pay for tax debts owed
• You use up to $10,000 of your retirement account money to purchase a home, and you have not owned a home in the last two years.

If you are withdrawing money from a 401(k) or 403(b) plan, the following situations are considered exempt from the 10% early withdrawal penalty:

• The money was required due to a qualified domestic relations court order, in a divorce or separation agreement.
• You left your job or retired after the age of 55.
• Distributions were received due to the death or disability of the retirement plan participant.
• You used the money to pay for medical expenses that were more than 7.5% of your adjusted gross income.
• You received the money from your retirement account in substantially equal payments over the course of your lifetime.

How to Report Early Withdrawal Penalties

If you decide your financial emergency warrants an early withdrawal from your retirement account, you can figure out the additional tax and penalty owed on Form 1040 or Form 5329.

Keep in mind, early withdrawal penalties may apply if you fail to repay a TSP Loan or TSP Hardship Withdrawal.

Many people take Social Security benefits as soon as they are eligible to begin receiving them, which for many Americans is age 62. But just because you can begin receiving Social Security benefits doesn’t mean you should take them right away. For example, you can often increase your Social Security payments by delaying when you receive them. Here are a few things to think about concerning when to begin receiving Social Security Benefits.

When Should You Take Social Security Benefits?

Delaying when you take Social Security Benefits can result in higher payments. In general, you can begin receiving Social Security Benefits at age 62, but in many cases, it’s worth delaying your start date for receiving Social Security payments if possible. This is because the Social Security Administration uses a sliding scale based on the year of your birth to determine your “normal” retirement age and the amount of money you will receive. Taking Social Security Benefits at age 62 may cause you to only be eligible to receive a partial payment.

Social Security normal age of retirement

Until 2002, the “normal retirement age” for everyone was at the age of 65. According to the Social Security Administration, the “normal retirement age” is the age a which beneficiaries receive full Social Security Benefits. The list below shows the “normal retirement age” based on the year you were born.

• 1937 or earlier – 65 years of age
• 1938 – 65 and 2 months
• 1939 – 65 and 4 months
• 1940 – 65 and 6 months
• 1941 – 65 and 8 months
• 1942- 65 and 10 months
• 1943-1954 – 66 years of age
• 1955 – 66 and 2 months
• 1956 – 66 and 4 months
• 1957 – 66 and 6 months
• 1958 – 66 and 8 months
• 1959 – 66 and 10 months
• 1960 or later – 67 years of age

Taking benefits early can reduce Social Security payments

You will receive reduced benefits if you decide to take Social Security benefits before the time of your normal retirement age. The total amount is reduced by five-ninths of 1% for each month you are under your normal retirement age, up to 36 months. If you are to receive benefits and you start more than 36 months before retirement age, your benefits will be further reduced by an amount of five-twelfths of 1% a month. Here is more information about age reduction of Social Security Benefits.

Good things come to those who wait

In general terms, you can increase Social Security benefits by waiting a few years to begin receiving them. If you accept your benefits after reaching your normal retirement age, you’ll get the full amount due to you with no reduction. You can even get additional Social Security credits be delaying your benefits start date after your normal retirement age. You will receive an additional percentage on your monthly Social Security check with each month you delay until you reach age 70.

Note: Military members who served between the years of 1940 and 2001 may receive additional Social Security credits for military service. You can read more about this benefit in this article: How Military Service Affects Your Social Security Benefits.

Considerations before you take Social Security Benefits

If you are unsure of where you stand with benefit amounts, you can contact the Social Security Administration to request a copy of a current statement of benefits. Your individualized statement will include pay outs for benefits taken at age 62, at your normal age of retirement, and at the age of 70. Statements are mailed annually but additional copies can be requested.

You’ll need to assess your own financial situation to determine your need and time frame for benefits. If you have the means to support yourself, wait as long as you can to request benefits. If you are still working, understand that your benefits may be reduced if you take them before your retirement age. For every $2 you earn in above the annual allowance, you will lose $1 in benefits. At the normal retirement age, you will lose $1 for each $3 you earn above a higher limit for income earned before the month you reach your retirement age.

If you can not live without the additional funds even before reaching your normal age of retirement, you should consider taking the reduced benefit payments to stay on track financially. The decision should be based on your needs, the age of your spouse, and even your life expectancy based on your present medical situation and family history.

The Social Security System offers a great benefit for taxpayers who paid into the system over the years. Unfortunately, it can be a little confusing if you haven’t had time to do a little research into available Social Security Benefits. This should not discourage recipients from learning as much as possible about the benefits which they are entitled to receive.  Failure to understand the system could cost you money at a time when you can least afford the loss.  Here we look at tips to increase social security benefits and make it easier in retirement years.

How to Increase Social Security Benefits

Pay attention to Social Security Statements. Over the years you have probably noticed an annual social security statement arriving in your mailbox.  It is important to pay attention to the information contained on this statement.  Carefully review your statement each year to ensure the earnings that have been reported are correct.  This history of your earnings play an important role in determining your Social Security benefits.  If you notice errors on the statement, it is your responsibility to report these mistakes to ensure the correct information is being used to determine your benefits. Correcting an error in your lifetime earnings could significantly increase social security benefits.

Age at retirement affects your benefits. Depending on when you were born the full retirement age is between 65 and 67 years of age.  Individuals may begin receiving benefits earlier (age 62) however it can reduce your benefits by up to 30%.  Whenever possible, holding off retirement until full retirement age is reached is in the best interest of your financial security in the future. Here is a full Social Security benefits chart by age. You will receive more money in the long run if you wait to take Social Security Benefits.

Military veterans are entitled to extra earnings. Servicemembers who have served on active duty between 1957 and 2001 are entitled to extra earnings that will boost their Social Security benefits.  It is important that men and women who have served during these periods check to make sure credits have been added to their record.  This happened automatically for military members who served between 1968 and 2001, but it is still a good idea to confirm you are receiving the full benefits for which you are entitled. Learn more about how military service affects Social Security Benefits.

Other areas of your personal finances are considered at tax time. The government has established income thresholds to determine who pays taxes on benefits and those who will not.  If half of your Social Security income, investment earnings, pension payments, tax-exempt interest and other wages surpass the threshold, you may find yourself owing taxes on benefits.  The thresholds are determined by your filing status and may result in you owing taxes on 50% – 85% of your benefits.

Avoid garnishments that reduce your benefits. As a general rule, Social Security benefits are protected from the majority of debt collection actions.  This is not the case with back taxes, outstanding federal student loans, child support and alimony.  If you have any of these debts lurking in your past, take the necessary steps to satisfy your debt obligations to protect your benefits from garnishments.

When you understand how your benefits work and what you can do to increase your Social Security paycheck.  For many retirees this paycheck may be the only form of income they will receive during their retirement years.  Whether Social Security is your only source of income or a supplement to other sources of income, it is important that you get the benefits to which you are entitled.