Investment basics Taxes and retirement

The federal government regulates and monitors company retirement plans for compliance with federal laws. For information on protecting your pension rights, call the Pension and Welfare Benefits Administration at (800) 998-7542.

One of the greatest benefits Uncle Sam offers is tax breaks encouraging Americans to save for retirement. When you invest in retirement accounts, your gains can grow tax-deferred. That might not sound like a big benefit at first. But look at the numbers.

If you began with a lump sum of $10,000 at the age of 30, your value in a taxable investment would equal $102,701 by age 70 (assuming an 8% return). That same investment tax-deferred would grow to $245,239.

This graph is hypothetical and does not represent an issued contract/certificate. The example assumes a $10,000 single investment, a real rate of return of 8% and a 28% tax rate. Returns may be reduced by applicable insurance charges (including management and administrative fees, mortality and expense charges and withdrawal charges.) Withdrawals of tax-deferred accumulations may be subject to deferred sales charges and are subject to ordinary income tax. If withdrawals are made by the owner who is less than 59 = years old, the accumulations withdrawn may incur a 10% IRS penalty.

Annuities are designed to provide tax deferral when purchased outside of qualified plans. If you are purchasing this annuity to fund a qualified plan, the tax deferral features are not necessary.

Employer plans

If your employer offers you a retirement plan, make sure you take advantage of it. Such plans are generally either defined benefit plans or defined contribution plans.

A defined benefit plan, also known as a pension plan, is usually completely funded by the employer and insured by the Pension Benefit Guaranty Corporation. Your payout is determined by a formula using years of employment times a percentage of compensation.

More common today are defined contribution plans, and one of the most popular is the 401(k) plan. The federal government does not guarantee how much you will accumulate. In 401(k) plans you are typically offered a choice of investment options, and you decide how much to contribute and how your contributions are allocated into the investment choices. Your contributions are made pre-tax, and you may also have the option of making after-tax contributions.

IRAs

A traditional IRA lets you put money away for retirement tax-deferred. You can wait to pay taxes on the earnings in the IRA until you begin taking withdrawals (usually when you've retired and perhaps are in a lower tax bracket).

	You'll use various investment instruments to help you grow your money. But there are several retirement account options for you to consider. You might choose to invest for retirement in a mutual fund. But that mutual fund could also be a funding vehicle for an IRA.

If you're under age 70 =, you can contribute to an IRA. If you meet income limits, your contributions can be tax deductible.

	Income limits rise gradually over the years. For example, married couples filing jointly in 2000 earned income of up to $52,000 could deduct the full $2,000 from their annual income. By 2007, that income limit raises to $80,000.

New tax laws increase the maximum amount you can contribute to an IRA (traditional and Roth) from $2,000 today to $5,000 by 2008. After that, the maximum contribution will be adjusted for inflation.

	Increase IRA Contribution Limits Maximum Contribution Year Without Catch-Up With Catch-Up 2002-2004 $3,000 $3,500 2005 $4,000 $4,500 2006-2007 $4,000 $5,000 2008 and after $5,000 $6,000

The Roth IRA was introduced in 1997, named for then Senate Finance Committee Chairman William V. Roth. It's different from a traditional IRA, because your earnings can be withdrawn tax-free. You cannot, however, claim a tax deduction for your contributions. But you can keep your money in a Roth IRA for as long as you want. Traditional IRAs require you to begin taking distributions once you reach age 70 =.

A traditional IRA may be a smart choice if you: Have an adjusted gross income of $95,000 (single) or $150,000 (married) or more. Will need to use the IRA funds in five years or less. Would need the money in the IRA to pay the taxes owed on a rollover to a Roth IRA. Anticipate being in a lower income tax bracket when withdrawals begin.

A Roth IRA may be a good choice if you: Have an adjusted gross income of $100,000 or less - and you are not married, filing separately. Do not need to withdraw the funds in the IRA for more than five years. Are able to pay the income tax from a source other than the proceeds of the IRA. Anticipate being in the same or a higher tax bracket when you begin withdrawals.

Roll over to an IRA

When you leave a job, one of the best ways to protect your 401(k) from taxes and penalties is to "roll" the money directly into an Individual Retirement Annuity (IRA). You don't have to pay any tax or tax penalties and there is no withholding tax on direct rollovers. Your assets can still grow tax-deferred until you withdraw the money later. Just remember that your 401(k) contributions typically are made before you pay any tax on the money - so when you do withdraw the money, you will be taxed on the amount you take out. If you take money out before you are 59 =, you may face tax penalties.

Another option may be to roll your money into a new employer's plan. Just make sure that the employer offers plenty of investment choices that meet your investment objectives and goals for growth - and that the plan accepts rollover contributions.

	Helpful Terminology
	What is qualified money? It's money that has never been subject to income tax. When you invest in your 401(k) with pretax dollars, you're investing "qualified money." What is nonqualified money? It's money that has already been subject to income tax.