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Money & Business

401(k)s & IRAs

published by Barnes & Noble

Save for tomorrow, starting today.

Setting aside money for retirement can seem like a chore—the last thing you
want to think about. But in reality it can be effortless, and the tax savings are too
substantial to ignore. Plan for a comfortable and rewarding retirement with:

• An overview of 401(k)s, 403(b)s, 457(b)s, and the various types of IRAs

• Quick-reference tables explaining all the major traits of each type of plan

• Guidelines on which types of investments to buy in retirement accounts

Tax Advantages of Retirement Plans Employer contributions can take the form of cash or com-
An Overview of Retirement Plans Retirement plans feature tax benefits that no other regular pany stock. Since employer contributions are essentially
A retirement plan is an investment account designed to investments or savings accounts offer. These benefits fall “free money,” it almost always makes sense try to take ad-
encourage you to save money for retirement by providing into two categories: vantage of any matching or profit-sharing options that your
special tax benefits. The plans are open only to account company offers.
owners (called participants) who meet certain qualifica- • Up-front tax incentives: These include income tax
tions based on income and other factors. There are dozens deductions or credits that you receive immediately Who Can Invest in Retirement Plans?
of types of retirement plans available to U.S. workers. This upon contributing to certain retirement plans. A tax Though people often associate retirement plans exclusively
guide covers the two most popular types of plans—401(k)s deduction is an amount of money that you can deduct with full-time workers at large companies who invest in
and IRAs—as well as other common plans, including: from your gross income in order to reduce your total 401(k)s, there are plans available to all kinds of workers,
tax liability. For instance, if you have $100,000 in gross including sole proprietors with no employees, small busi-
• 403(b)s income, and tax deductions worth $10,000, you’ll ness owners with a few employees, and many more. (For a
• 457(b)s pay tax on only $90,000 of your income. A tax credit detailed explanation of retirement plan eligibility, see “Eligi-
• SEP IRAs reduces your actual tax bill by a certain amount. For bility Requirements” in Retirement Plan Terminology.)
• SIMPLE IRAs instance, if you owe $10,000 in tax and have a tax
credit of $3,000, your tax bill would fall to $7,000. How to Set Up a Retirement Plan Account
How Retirement Plans Work • Tax-favored treatment of investment gains: Some You may enroll in retirement plans through your employer
Retirement plan accounts are like regular investment ac- retirement plans, called tax-free plans or Roth plans, or directly through a bank, financial services firm, or insur-
counts, but with a few twists. Here’s how they work: allow you to pay no tax whatsoever on gains. Other ance company:
plans, called tax-deferred plans, allow you to avoid
1. Set up an account: You establish a retirement plan paying taxes on gains until retirement. Some plans are • Enrolling through an employer: Many employers
account through your employer, a bank, a financial available in two versions: a tax-deferred version and a sponsor, or offer, at least one type of retirement
services firm, or an insurance company. tax-free (Roth) version. plan. These plans, known as employer-sponsored
2. Contribute money to the account: Depending on plans, include 401(k)s, 403(b)s, 457(b)s, SIMPLE IRAs,
the plan, you can contribute by deducting money from Financial Discipline and Retirement Plans and SEP IRAs. In this kind of setup, you company’s
your paycheck at each pay period or by depositing It can be hard to find the motivation or will to save money human resources or benefits department works with
money from your savings into your retirement account now when you know you probably won’t use it for decades. an outside bank, financial services firm, or insurer to
whenever you choose. The amounts you can contribute Investing in a retirement plan can help instill the financial administer employee retirement plan accounts. Some
depend on several factors, including the plan’s discipline required to do just that. companies automatically enroll all eligible employees
contribution limits and your income. Some retirement plans transfer money right from your in their plan, while others require you to opt in. If
3. Invest the money in your account: Most plans allow paycheck into a retirement plan account before you have you need to opt in manually, you’ll be required to
you to choose among various investment options, such the chance to touch it. Other plans require you to contrib- complete a few forms to set up an account. From
as stocks, bonds, and mutual funds. ute a minimum amount of money each year but don’t allow there, you’ll likely work directly with representatives
4. Sell your investments and withdraw money: you to withdraw it—except for qualified uses—without a from the outside firm to set deposit amounts, select
Though you can withdraw money from a retirement penalty. Though these features may seem strict, they can investments, check account balances, and so on.
account at any time, for most plans you’ll incur a 10% really help you avoid spending money that could go toward • Enrolling through banks, financial services firms,
penalty for withdrawing money before age 59 1/2, building a secure financial future for you and your family. or insurers: By establishing a retirement account with
unless you qualify for certain exemptions. Depending a bank, financial services firm, or insurance company,
on the type of plan you have, you may or may not owe Employer Contributions you can set up, invest in, and manage certain types
taxes at the time of withdrawal on gains (profits) you’ve Employer contributions are deposits that companies make of retirement plans entirely on your own. The most
earned from your investments in the account. Though into retirement plans on behalf of plan participants. These common types of plans that individuals invest in
early withdrawals may be penalized, you can buy and contributions take two forms: through banks, financial services firms, and insurers
sell investments within the account at any time. are IRAs (Individual Retirement Accounts). To enroll,
• Employer match contributions: The company you complete a few forms online, in person, or by mail,
Why Invest in Retirement Plans? contributes on an ongoing basis a certain percentage and make an initial deposit (usually at least $500–1,000)
Regardless of your age or income, investing in retirement of the amount that you contribute. to fund the account. You then need to decide, either on
plans is a great idea. Retirement plans offer tax advantages, • Profit-sharing contributions: The company makes your own or with a financial advisor, which investments
encourage financial discipline, and in many cases make you a lump-sum contribution at certain intervals, such as to make within your plan.
eligible for employer contributions to your savings. every year or every six months.
 www.quamut.com 401(k)s & IRAs

Contribution Sources • Transfers: “Transfers” occur when you move assets

Retirement Plan Terminology You can fund retirement plans in two main ways. between retirement plans not sponsored by employers,
Before you can compare the various types of retirement such as IRAs. Note that transfers are sometimes also
plans and decide which one suits you best, it helps to know • Payroll deductions: Employer-sponsored plans deduct referred to as rollovers.
some basic retirement plan terminology. money directly from your paycheck each pay period.
These deductions can consist of pretax or after-tax Borrowing Privileges
Eligibility Requirements dollars, depending on the plan. Employer-sponsored plans often allow you to borrow mon-
You must meet certain criteria to invest in retirement plans. • Independent earnings: Plans not affiliated with ey from your retirement plan account, though some plans
These criteria may include age, length of employment, employers, such as most IRAs, require you to use allow borrowing only for “hardship” circumstances, such
amount and type of income, marital status, and whether or your own savings (from earned income) to fund your as medical emergencies. Borrow from your retirement plan
not you already participate in other retirement plans. Eligi- accounts, either on a pretax or an after-tax basis. In only as an absolute last resort: borrowed assets don’t ben-
bility requirements vary from plan to plan, but two general this case, “pretax” contributions sometimes qualify for efit from tax-deferred or tax-free growth until the money is
rules apply to all retirement plans: an immediate income tax deduction since they can’t be returned to the account.
deducted directly from your paycheck.
• Earned income vs. passive income: Retirement plans Beneficiaries
require you to have earned income in order to open an Pretax Dollars vs. After-Tax Dollars Retirement plans allow you to specify the primary and
account or contribute. Earned income is income from • Pretax dollars: Money deposited into a retirement contingent beneficiaries who will receive your plan’s assets
salary, commissions, or other work-related sources, account (or elsewhere) before it’s taxed. Using pretax when you die. Contingent beneficiaries receive your plan’s
or from alimony. Passive income, such as income you dollars to contribute to a retirement account is among assets only if your primary beneficiaries are deceased or
receive from investment-related dividends, annuities, the few ways you can use your “raw” pay before taxes otherwise unable to receive your assets upon your death.
or rental properties, does not qualify you to invest in reduce it to the amount you actually receive. Employer-
retirement plans. sponsored plans, such as 401(k)s, can be funded with Required Minimum Distributions
• Individual vs. joint ownership: All retirement plans pretax dollars. All retirement plans (except Roth plans) require you to start
are owned solely by the person who establishes the • After-tax dollars: Money deposited into a retirement taking required minimum distributions (RMDs), or with-
account. Qualified plans cannot be owned jointly, even account (or spent elsewhere) that has already been drawals from the plan, after age 70 1/2. The amount of the
by married couples. subject to tax. Your “take-home” pay—the amount withdrawals varies based on a number of factors, including
of money you actually receive after taxes have been your specific age and retirement plan account balance. You
Vesting Schedules taken out of your paycheck—consists of after-tax can make withdrawals periodically throughout the year,
Any money you contribute to a retirement plan is yours dollars. Some retirement plans, such as Roth IRAs, can and you always have the option to withdraw more than the
immediately. Employer match contributions, though, may be funded only by after-tax dollars. RMD amount. Failure to make annual RMDs can result in an
not be yours to keep right away. The vesting schedule of a excess accumulation penalty equal to 50% of the amount
retirement plan refers to the timeframe in which your own- Withdrawal Penalties that you should have withdrawn.
ership of your employer’s contributions vests, or takes ef- The IRS imposes a 10% penalty for most withdrawals made A few exceptions apply. For instance, if you continue to
fect. For instance, your employer’s contributions might vest before you reach age 59 1/2. The 10% is in addition to any work past age 70 1/2 for the company that sponsors your
one year from each contribution date. If you cancel the plan taxes owed on investment gains within the account. 401(k) plan, you don’t have to take RMDs.
or leave your job, you won’t receive any unvested employer
contributions (though you’ll keep all vested contributions, Exceptions to the Withdrawal Penalty Fees and Minimums
as well as money that you yourself contributed). The government allows penalty-free withdrawals from Some retirement plans charge annual maintenance fees of
retirement plans for certain qualified expenses, such as about $15–50. Typically, fees for most employer-sponsored
Enrollment and Contribution Deadlines medical emergencies, disability-related costs, college tu- plans are paid by your employer, not by you. In addition to
The IRS has firm annual enrollment deadlines and contribu- ition, and the purchase of a first home. Penalty exceptions annual fees, some plans require you to maintain a minimum
tion deadlines for each type of retirement plan: vary from plan to plan. Despite these exceptions, it’s always balance and/or to make a minimum annual contribution.
best to avoid withdrawing money early from a retirement
• Enrollment deadlines: Specify the date by which you plan. By not withdrawing early, your money stays invested
must set up the retirement plan account and takes full advantage of the tax-deferred growth that all 401(k) Retirement Plans
• Contribution deadlines: Specify the date by which retirement plans offer. 401(k) retirement plans, or 401(k)s for short, are the most
you must make contributions into the account common type of employer-sponsored retirement plan in the
Rollovers and Transfers United States. They’re offered primarily by larger, for-profit
These deadlines vary from plan to plan and are separate The IRS has made it increasingly easier to move and com- companies with 10 or more employees, though tax-exempt
from any deadlines that your company might impose. bine retirement accounts, so long as you keep your money organizations may also set up 401(k) plans.
within a qualified plan of some kind. There are two terms
Contribution Limits that refer to the process of moving assets from one retire- How 401(k) Plans Work
Each type of plan has strict contribution limits that specify ment plan account into another: rollovers and transfers. 401(k) plans allow you to contribute a certain amount of
the total amount of money that you can contribute into your your paycheck each pay period into your own 401(k) retire-
account each year. Contribution limits vary widely from plan • Rollovers: When you leave a company, you’re typically ment account. The amount of money that you contribute
to plan based on many factors, such as your total annual allowed either to leave your retirement money in that each period can be a set amount or a fixed percentage of
income and the other types of retirement plans you own. company’s retirement plan, move it into your new your total annual pay. The investment options available to
Certain plans allow participants who are 50 or older to make company’s plan, or move it into a special kind of IRA you in a 401(k) plan vary, based on:
catch-up contributions, which increase the plan’s contribu- called a rollover IRA. Transfers of employer-sponsored
tion limit by several thousand dollars per year. retirement plan assets are called “rollovers.“

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 www.quamut.com 401(k)s & IRAs

• The selection of investments offered by the firm hired 401(k) Company Match and Profit Sharing The Special 403(b) Catch-Up Provision
to administer the company’s 401(k) accounts Companies may choose to include company match or The one unique trait of 403(b)s is a “catch-up” provision
• The investments from that selection that your company profit sharing programs in their 401(k) plans to supplement available only to employees with 15 or more years of ser-
chooses to offer employees their employees’ 401(k) contributions. Companies often use vice with a qualified organization and who have averaged
these features as a way to promote employee recruitment contributions of less than $5,000 per year. If you qualify, this
For instance, if your company uses Fidelity Investments to and retention. provision increases your contribution limit by up to $3,000
administer its 401(k) plan, its plans will offer only invest- per year, up to a total lifetime catch-up limit of $15,000. If
ments that Fidelity sells. The company might also choose • Company match: This option allows employers to you’re over age 50, you can combine this catch-up provision
to restrict that selection further by allowing you to invest match your 401(k) contributions each pay period, with the more universal $5,000 per year catch-up contribu-
401(k) contributions exclusively in Fidelity mutual funds. usually up to a fixed percentage. For instance, if you tion, which would enable you to contribute a total of up to
In addition, your company may offer you an incentive to contribute 15% of your pretax pay to your 401(k) $23,000 annually to your 403(b) plans.
encourage you to invest a portion of your contributions in every pay period, your employer might match your
the company’s own stock. contributions dollar-for-dollar up to 5%.
• Profit sharing: In this option, your employer makes 457(b) Retirement Plans
Key Traits of 401(k) Retirement Plans one large annual contribution to your 401(k) plan 457(b) plans are very similar to 401(k)s and 403(b)s but are
based on company profits (usually at the end of the available only to U.S. government employees and employ-
Trait Guidelines calendar year), rather than smaller contributions each ees of certain nongovernmental tax-exempt U.S. employers,
pay period. such as public schools and universities.
Tax benefits In most 401(k) plans, contributions
are income tax–deductible and grow
The potential for you to benefit from both your own con- 457(b)s vs. 401(k)s and 403(b)s
tax-deferred until withdrawal, when
tributions and those of your employer is referred to as the 457(b) plans are similar to 401(k)s and 403(b)s, with the fol-
taxes become due. In some newer
double contribution benefit of 401(k) plans. lowing major exceptions:
401(k) plans, such as Roth 401(k)s,
contributions are not tax-deductible
but grow tax-free for life (see 401(k)
401(k) Plan Variations • Withdrawal penalties: Assets in 457(b) accounts are
Plan Variations). Over the years, the government has developed many 401(k) not charged a 10% penalty for withdrawal before age
plan variations to help companies tailor plans to their bud- 59 1/2.
Eligibility Participation is voluntary and must get, organizational structure, and industry. The two most • Special catch-up provision: 457(b) plans also offer a
be open to every employee age 21 notable variants are Roth 401(k)s and solo 401(k)s. unique catch-up provision. If you’re within three years
or older. Most companies impose a of retirement (as defined by your specific plan), you
waiting period—usually six months • Roth 401(k): Traditional 401(k) plan contributions can double your usual catch-up contribution amounts,
to a year—after which you can enroll use pretax dollars, are income tax–deductible, and under certain conditions.
in the plan. grow tax-deferred until withdrawal. Roth 401(k) • Multiple plans: Most employers who offer 457(b)
plan contributions use after-tax dollars and are not plans also qualify to offer 401(k) or 403(b) plans.
Vesting Your contributions vest immediately.
Your employer’s contributions typi- deductible, but are never taxed. Companies that offer If you’re an employee of such a company, you can
cally vest over a set period of time. Roth 401(k) plans allow you to divide your contributions contribute up to the maximum contribution limits of
between Roth and traditional 401(k) accounts. both plans. In addition, if you’re over age 50, you can
Enrollment Plan must be established on or be- • Solo 401(k): Solo 401(k)s are designed to give sole contribute the special additional catch-up amount into
deadlines fore December 31. You can usually proprietors (and their spouses) and some types of both your 403(b) and 457(b) plans.
enroll at any time once you become business partnerships the double contribution benefit
eligible to participate. of traditional 401(k)s. Solo 401(k)s offer higher annual
contribution limits (relative to the participant’s income) Traditional IRAs
Contribution Employer must make all contribu-
than other small company plans, such as SEP and Traditional Individual Retirement Accounts, called Tradi-
deadlines tions by its business tax filing date.
Your contributions can be ongoing SIMPLE IRAs, and also permit after-tax Roth-style tional IRAs (or often just IRAs for short), are retirement
as long as you’re employed with the contributions. plans that you can set up on your own, whether or not
company. you participate in other, employer-sponsored retirement
accounts.
Contribution For 2007, you can contribute up to 403(b) Retirement Plans
limits $15,500 ($20,500 if you’re age 50 or 403(b) plans are similar to 401(k) plans but are reserved How Traditional IRAs Work
older). The total contributions to your for employees of tax-exempt nonprofit organizations, such Unlike 401(k)s, 403(b)s, and 457(b)s, traditional IRAs are
plan (including both your contribu- as public schools, hospitals, foundations, charities, and retirement accounts that you set up directly with a bank,
tions and your employer’s) cannot churches and other religious organizations. Like 401(k)s, a financial services firm, or an insurance company. Even
exceed $45,000 for 2007 ($50,000 per 403(b)s allow you to set up tax-deferred accounts and though they’re not tied to your employer, they do have vari-
year if you’re age 50 or older). These
invest in mutual funds, stocks, bonds and various other ous contribution limits based on your annual income. Here’s
limits typically increase each year.
investments. a quick breakdown of how they work:
Contribution Pretax or after-tax (Roth) payroll de-
sources ductions (see 401(k) Plan Variations). 403(b)s vs. 401(k)s 1. You set up an IRA account: The setup process
There are two major differences between 403(b) plans and usually involves filling out a few simple forms and
Withdrawal A 10% penalty applies to withdrawals 401(k) plans: providing an initial deposit of $500–1,000, though some
penalties made prior to age 59 1/2. Exceptions IRAs have initial deposit requirements of $25 or less.
include death, disability, or rollovers. • Company match: 401(k) plans offer company- 2. You make contributions: You can contribute to your
Rollovers Most plans can be rolled over into matching contributions much more often than 403(b) account at any time during the year up to the allowable
other retirement plans. plans do. limit and before the annual contribution deadline.
• Company management: Companies that offer Certain contributions can be tax-deductible, though
Borrowing Most 401(k) plans allow participants 403(b) plans are not required to be involved in the restrictions apply (see Key Traits of Traditional IRAs).
to borrow from their accounts. management or administration of the plans. As a 3. Your investments grow tax-deferred: You don’t pay
result, 403(b)s often leave you with more freedom to taxes on investment gains until you withdraw your
Beneficiaries Participants can designate primary
manage your accounts, but also with less guidance. assets, either after age 59 1/2 or for certain qualified
and contingent beneficiaries.
exceptions.
Required In most cases, participants must be- Key Traits of 403(b) Retirement Plans 4. You withdraw your money after age 59 1/2: Any
minimum gin taking a minimum amount of an- All of the major features of 403(b) plans—tax benefits, eligi- investment gains that you withdraw after age 59 1/2
distributions nual distributions after age 70 1/2. bility, vesting, contribution limits, and so on—mirror those are subject to income tax based on your tax bracket at
of 401(k) plans. Moreover, 403(b)s work the same way as the time at which you make the withdrawals.
Fees and Typically, participants pay no annual
401(k) plans: you invest pretax dollars, and the assets in the
minimums fees. Minimums, if any, are deter-
account grow tax-deferred. Or, under the Roth 403(b) varia-
mined by the employer.
tion, you invest after-tax dollars that grow tax-deferred and
are tax-free upon withdrawal.
 a

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Key Traits of Traditional IRAs • No tax deductions: Since Roth IRA contributions are Traditional IRAs vs. Roth IRAs
made with after-tax dollars, they don’t qualify for tax Though Roth IRAs permit tax-free growth and withdrawals,
Trait Guidelines deductions. they’re not necessarily the best choice for everyone. To
help decide between any tax-deductible and tax-deferred
Tax benefits Contributions are tax-deductible unless Roth and Traditional IRAs differ in a few other significant, plan, such as a Traditional IRA and its tax-free Roth version,
you’re eligible to enroll in an employer-
but more complex, ways. The following table breaks down consider your current tax bracket and your expected tax
sponsored retirement plan and your
all the important traits of Roth IRAs, including all the specific bracket at the time you plan to withdraw the funds:
income exceeds $50,000–60,000 (for
features that distinguish Roths from Traditional IRAs.
single filers) or $80,000–100,000 (for
• If you expect your tax bracket at withdrawal to be roughly
married couples filing jointly). If you
Key Traits of Roth IRAs the same as, or higher than, your current tax rate, you
have income within these ranges, you
should probably choose the Roth version of the plan.
may qualify for a reduced deduction.
Trait Guidelines • If you expect your tax bracket at withdrawal to be
If you’re not eligible for an employer-
sponsored plan, you can deduct your significantly lower than your current tax bracket, you
Tax benefits You never have to pay taxes on any
IRA contributions regardless of your should probably choose the standard tax-deductible/
investment gains or withdrawals if:
income level. Once you make contri- tax-deferred version of the plan.
• Your account has been open for at
butions, they grow tax-deferred until least five years
withdrawal, when taxes become due. • You withdraw at age 59 1/2 or later Though helpful as a general guideline, this rule of thumb
• You use the money to purchase doesn’t apply to all situations. Even if you expect your tax
Eligibility If you’re under age 70 1/2, you can your first home bracket at withdrawal to be much lower than your current
set up a Traditional IRA as long as you • You become disabled or die rate, you might still consider a Roth for these reasons:
have enough earned income that year
to meet the minimum initial contribu- Eligibility Plan participants can be any age. • Estate planning: Roth IRAs pass to beneficiaries
tion requirement. Singles with earned income below without incurring a federal income tax liability, though
$99,000 ($156,000 for married joint
they may be subject to estate taxes.
Vesting All contributions vest immediately. filers) can make the full contribution
• Control of assets after retirement: Only Roth
plus the “catch-up” contribution, if ap-
Enrollment A Traditional IRA for a given year must IRAs allow you to retain complete control over your
plicable. Contribution limits decrease
deadlines be set up by April 15 of the next year. retirement account assets past age 70 1/2, with no
for singles with $99,000–114,000 of
For example, you have until April 15, required minimum distributions.
earned income ($156,000–$166,000
2008, to set up an IRA for 2007. • High income: Even if you earn too much to qualify
for married joint filers). Singles or cou-
for a Traditional IRA deduction, you may still qualify to
ples with income above these ranges
Contribution All contributions to an IRA for a given contribute to a tax-free Roth IRA.
can’t contribute to a Roth IRA.
deadlines year must be made by April 15 of the
next year. For example, you have until Vesting All contributions vest immediately. Converting a Traditional IRA to a Roth IRA
April 15, 2008, to make all of your con- The IRS allows you to convert Traditional IRAs to Roth IRAs
tributions to an IRA for 2007. Enrollment A Roth IRA for a given year must be
with no penalties, assuming you meet certain income
deadlines set up by April 15 of the next year. For
conditions. If you have an adjusted gross income below
Contribution Up to $4,000 per year or, if you’re age example, you have until April 15, 2008,
$100,000 (single or married filing jointly), you can convert all
limits 50 or older, up to $5,000. In 2008, to set up a Roth IRA for 2007.
or part of your Traditional IRA assets to a Roth IRA.
these limits each increase by $1,000.
Contribution All contributions to an IRA for a given One catch applies: when you do the conversion, you’ll
Contribution Earned income (salary, commissions, deadlines year must be made by April 15 of the need to pay taxes on any gains in the Traditional IRA, even if
sources other work-related sources, alimony). next year. For example, you have until you’re simply moving those assets into your new Roth IRA.
April 15, 2008, to make all of your con-
Withdrawal A 10% penalty applies to withdrawals tributions to an IRA for 2007.
penalties made prior to age 59 1/2. Exceptions SEP IRA and SIMPLE IRA Plans
Contribution Up to $4,000 per year or, if you’re age
include death, disability, higher edu- SEP IRAs and SIMPLE IRAs are two types of IRAs that em-
limits 50 or older, up to $5,000. In 2008,
cation expenses, and the purchase of ployers can establish on behalf of their employees.
these limits each increase by $1,000.
a first home.
Contribution Earned income (salary, commissions, SEP IRAs
Transfers Most plans can be transferred to other work-related sources, alimony).
sources Simplified Employee Pension Individual Retirement Ac-
other Traditional IRAs or other (pretax)
counts, known as SEP IRAs, are IRAs that business owners
retirement plans. Withdrawal Since Roth contributions are made
can set up and fund on behalf of employees and/or them-
penalties with after-tax dollars and don’t qualify
Borrowing Loans from IRA accounts are not selves. SEP IRAs are most often used by:
for tax deductions, no penalty ap-
permitted. plies to early withdrawals equal to the
• Self-employed sole proprietors who don’t otherwise
amount of your original contributions.
Beneficiaries You can designate both primary and have access to employer-sponsored plans, such as
Any gains realized by early withdraw-
contingent beneficiaries. 401(k)s, for their own retirement investing purposes
als are subject to income tax and a
10% penalty, however. • Small-business owners who want to offer a basic
Required After 70 1/2, you’re required to begin retirement plan to employees without the complexity
minimum withdrawing certain minimum annual Transfers Most plans can be transferred to other and expense of setting up a 401(k) plan
distributions amounts as of April 1 of the year after Roth (after-tax) retirement plans.
you turn 70 1/2.
How SEP IRAs Work
Borrowing Loans from Roth IRA accounts are not
Fees and Annual fees range from $0–50. Mini- SEP IRAs for self-employed sole proprietors work a bit dif-
permitted.
minimums mums range from $0–25, depending ferently from SEP IRAs for employers.
on the plan provider. Beneficiaries You can designate primary and con-
tingent beneficiaries. Roth IRAs are • If you’re a self-employed sole proprietor: You set
the only IRAs that can be passed on up an account with a financial services firm and make
income tax–free to beneficiaries. contributions up to certain annual limits, just as you
Roth IRAs would with a Roth or Traditional IRA.
Required Roth IRAs have no required minimum
Roth IRAs are similar to traditional IRAs, but with three • If you’re an employer: You set up SEP IRA accounts
minimum distributions.
major differences: with a financial services firm for yourself and your
distributions
employees—employees do not set up or administer
• After-tax dollars: All Roth IRA contributions are made Fees and Annual fees range from $0–50. Mini- their own accounts. By law, as an employer you’re
with after-tax dollars. minimums mums range from $0–25, depending required to contribute the same percentage of income
• Tax-free withdrawals: Investments in Roth IRAs grow on the plan provider. into your employees’ accounts as they contribute
tax-free and are not subject to tax upon withdrawal. into their own accounts each year. Employees cannot
 www.quamut.com 401(k)s & IRAs

make contributions on their own but can roll over their 1. Set up a Rollover IRA account: Contact the financial
accounts into Rollover IRAs if or when they leave the Rollover IRAs services firm you intend to work with and ask about
company (see Rollover IRAs). When you leave your job for any reason, you usually have the forms and other documentation required to open
four choices regarding the retirement savings you hold in a Rollover IRA. You’ll usually have to provide a copy of
Regardless of whether you’re a sole proprietor or an connection to that job: your most recent retirement plan statement. In most
employer, SEP IRA contributions are usually tax-deductible cases, the firm will offer to contact your employer to
and grow tax-deferred until withdrawal. • Do nothing: Many employers will allow you to maintain handle the rest of the rollover process for you. Even if
your account after you leave. You can continue to they do, you should still follow the remaining steps.
The Advantages of SEP IRAs manage the investments within the account without 2. Tell your current employer: Tell your employer that
SEP IRAs have three main advantages: any change or interruption. You cannot make additional you intend to roll over your retirement plan. Give them
contributions, however. the contact information of the firm where your Rollover
1. High contributions: If you’re an employer, SEP IRAs • Transfer to a new plan: If you’re changing jobs and IRA will reside, and tell them you want to perform a
let you contribute up to 25% of your eligible annual your new employer offers a retirement plan, you may direct rollover rather than have them cut you a check
income (and that of your employees), up to $45,000 be able to move your assets into the new plan. for the balance of your account. If they insist on cutting
per year. These limits vastly exceed those of IRAs and • Withdraw your assets as cash: If you sell and you a check, make sure the check is made payable to
allow self-employed people to contribute as much as withdraw your assets, the regular withdrawal rules your Rollover IRA provider—not to you.
the maximum annual 401(k) contribution ($45,000, and penalties will apply. If you choose this option, your 3. If your employer issues a check payable to you:
including employee and employer contributions). SEPs employer will also be required to withhold 20% of your Your employer will be required to withhold 20% of
don’t allow catch-up contributions, however. account balance for tax purposes. your balance, and you may be required to pay a 10%
2. High deductions: SEP IRA contributions are usually • Roll over your assets to a Rollover IRA. penalty when you do the rollover. To prevent this, ask
100% tax-deductible, which means you can take up to your employer to cancel the check and make it payable
a $45,000 tax deduction annually—much more than What’s a Rollover IRA? to your Rollover IRA provider. If they refuse, you can
the $4,000 deduction for Traditional IRAs. A Rollover IRA is a type of retirement account into which avoid a 10% penalty as long as you use the check made
3. Multiple plans: You can create SEP IRAs even if you you can transfer assets from an employer-sponsored re- payable to you within 60 days to fund a Rollover IRA.
also have another IRA. Likewise, you can set up a tirement plan after you leave your job. Banks, insurance However, your employer will have already withheld
SEP even if you already have an employer-sponsored companies, and financial services firms offer Rollover IRAs. 20% of your account balance for taxes. Usually, the
plan, such as a 401(k), as long as the income you use They come in two varieties: only way to get that money back is to add that amount
to contribute to the SEP IRA comes from a separate to your Rollover IRA with your own money for the time
source. SEP IRAs are a great option if you have an • Traditional Rollover IRAs: For participants rolling over being, and then request a refund for those funds when
employer-sponsored plan but also earn income on the assets from tax-deferred retirement accounts, such as you file your tax return. To qualify for this refund, you
side by running your own business. regular 401(k)s, 403(b)s, or 457(b)s must roll over 100% of your account balance.
• Roth Rollover IRAs: For participants rolling over
SIMPLE IRA Plans assets from tax-free accounts, such as Roth 401(k)s
SIMPLE IRAs—“SIMPLE” stands for Savings Incentive How to Manage Your Retirement Plan
Match Plan for Employees—are employer-sponsored re- Though it’s possible to roll over a pretax retirement plan to Once you have one or more retirement plans established,
tirement plans that give employers a basic alternative to tra- a tax-free Rollover Roth IRA, doing so is a taxable event, you need to decide how to invest the money that you con-
ditional 401(k)s, which are more expensive and complicated which means you’ll owe taxes on any gains in the account tribute to them throughout the year. To choose the right
to set up than SIMPLE IRAs. The simplicity and relative af- at the time of the rollover. Due to these negative tax conse- investments for your retirement plan, you need to:
fordability of SIMPLE IRA plans make them very popular with quences, it’s best to avoid doing this type of rollover.
small businesses and partnerships—they’re available only 1. Determine your asset allocation
to companies with 100 or fewer employees. As companies Should You Use a Rollover IRA? 2. Select specific investments based on that allocation
grow, they typically shift from offering SIMPLE IRA plans to In most cases, it makes sense to use a Rollover IRA unless:
401(k)s, which feature much larger contribution limits and How to Determine Your Asset Allocation
usually more investment options. • You’re satisfied with your existing plan and your Asset allocation is the process of diversifying your assets
employer will let you keep it there for at least several across a variety of investment types to reduce risk and
How SIMPLE IRAs Work years after you leave maximize return. The asset allocation that suits you best
• For employees: SIMPLE IRAs work like 401(k) plans— • You find your current employer’s retirement plan depends primarily on your age—in particular, the number
you set up an account with a financial services firm satisfactory and you want to roll over the assets to that of years left until you plan to retire. That said, a few general
through your workplace and contribute to the account plan instead rules of thumb apply:
with pre-tax dollars, which are deposited into the
account at each pay period. Your contributions are not Unless one of these two situations applies to you, rolling • The younger you are: The more time you have until
limited to a percentage of your annual salary—they’re over your plan assets into a Rollover IRA is usually a good retirement, the more risk you can tolerate. Tolerating
capped at $10,500 per year. idea. A Rollover IRA can help you: risk in this case means being able to invest comfortably
• For employers: SIMPLE IRAs are the only type of in aggressive investments—those that tend to rise
retirement plan that requires employers to make • Avoid taxes and penalties: With a Rollover IRA, and fall dramatically in value but that have the greatest
employer-match contributions. SIMPLE IRA employer you avoid the taxes and penalties you’d pay if you potential for gains over the long term. Examples of
match contributions must equal 3% of the employee’s transferred or withdrew money from your account. these types of investments include small-cap stocks
annual salary (though a few exceptions apply). • Keep growing your money: Using a Rollover IRA is and emerging market international stocks. Here the
a seamless way to keep your retirement investments term cap refers to the size, or market capitalization, of
The Advantages of SIMPLE IRAs growing without interruption. the company. Smaller companies have smaller market
Although annual employee contribution limits for SIMPLE • Expand your investment options: Rollover IRAs caps (market values) than larger companies.
plans are lower than those of other employer-sponsored usually allow you to invest in virtually any type of • The older you are: The closer you are to retirement,
plans, SIMPLE IRAs do offer two significant advantages over investment, from individual stocks to bonds to mutual the less risk you can tolerate. Older participants should
SEP IRAs and other small-business retirement plans: funds, depending on the financial firm you choose. Any favor more moderate or conservative investments,
constraints imposed by your employer-sponsored plan such as bonds, CDs, and money market funds.
• Catch-up contributions: Employees age 50 and up will no longer apply.
can make extra “catch-up” contributions up to $2,500 Asset allocation is not just about minimizing risk but also
per year beyond the ordinary contribution limits. How to Roll Over Your Existing Retirement Plan Account about maximizing return. It’s been shown time and again
• Higher contributions for some employees: Since into a Rollover IRA that diversifying your money across various investments
employee contributions aren’t limited to a percentage To set up a Rollover IRA, you need to take action before you that react differently to economic and market changes can
of salary, employees at certain income levels can leave your job. To do so, you must: lift your overall portfolio performance over the long term.
potentially contribute more annually to a SIMPLE IRA than
to SEP IRAs. For example, if you’re age 50 or older and
earn $25,000 (after deductions), you could contribute at
most $6,250 to a SEP IRA but up to $12,500 to a SIMPLE
IRA (including a $2,500 catch-up contribution).
 www.quamut.com 401(k)s & IRAs

Sample Asset Allocations • Actively managed funds: Funds in which managers

Below are suggested asset allocations for conservative, make their own picks for their portfolio and actively How to Consolidate Different
moderate, and aggressive retirement investors. Often, the buy and sell securities Retirement Plans
easiest way to allocate your retirement plan funds is by • Passively managed funds (index funds): Funds that
using index mutual funds or index ETFs (exchange-traded attempt to mimic the performance of an established Chances are you’ll establish a variety of different retire-
funds). These investments contain a basket of stocks or broad-market index (such as the S&P 500, which ment accounts over the course of your career. Rather than
bonds of one particular type, such as small-cap stocks, includes 500 of the largest U.S. companies) maintain these separate accounts, you can in many cases
large-cap stocks, international stocks, or bonds. One par- consolidate, or combine, your various retirement plan ac-
ticularly conservative option is a money market fund— Actively Managed Funds vs. Index Funds counts into one account.
a mutual fund that invests in short-term debt instruments Actively managed funds have higher expense ratios than
that, though not FDIC-insured like a bank account, are very index funds. An expense ratio is a fee that funds assess Why Consolidate Your Retirement Plans?
safe. (For more information on asset allocation, see the to cover their costs. Though you might expect actively Consolidating plans can help you with:
Quamut guide to Investing Basics, available in Barnes & managed funds to justify their higher expense ratios with
Noble bookstores and online at www.quamut.com.) superior returns, in reality, roughly two-thirds of actively • Paperwork and convenience: Maintaining one
managed funds fail to beat their relevant indexes. For this account with one firm means you’ll get only one
Conservative Asset Allocation reason, index funds are often the better choice for most in- statement every month and one annual statement at
vestors, since their expenses are lower, and lower expenses the end of each year. Also, with just one account, you’ll
make a significant difference in returns over time. deal with only one firm for customer service issues.
bonds 65% • Investment management: It’s much easier to
large-cap stocks 15% Tips on Comparing and Selecting Specific Mutual Funds maintain your desired asset allocation within one
international stocks 10% • Performance: Ignore the previous year’s performance account rather than across various accounts.
and focus instead on the fund’s performance over the • Annual fees: Consolidating your various accounts
small-cap stocks 5%
past 5–10 years at least. Keep in mind, however, that into once account can reduce or eliminate annual
money market 5%
past performance is no guarantee of future results. maintenance fees.
• Expenses: Avoid index funds with expense ratios over
1.0% (or 1.5% for actively managed funds). Which Plans Can Be Consolidated?
• Manager: Focus on funds with managers who have led The table below indicates which types of retirement plans can
Moderate Asset Allocation the fund for at least the past five years. be consolidated into which other types. Note that not all types
can be consolidated: for instance, you can consolidate a Roth
Never invest simply on a hunch or based on a tip. Instead, IRA into another Roth IRA, or into a Roth 401(k), Roth 457(b),
bonds 40% work with a financial advisor (if you can afford one) and/or or Roth 403(b), but not into a Traditional IRA. Regardless of
large-cap stocks 30% research mutual funds yourself by consulting a respected which type of consolidation you’d like to do, it’s a good idea to
international stocks 20% source, such as Morningstar (www.morningstar.com). consult a tax advisor and/or a financial planner for guidance.

small-cap stocks 10%

Stocks, Bonds, and Other Investments A(n) . . . Can be consolidated into a(n) . . .
money market 0% Though IRAs and other retirement accounts allow you to
Traditional IRA • Traditional IRA
invest in individual stocks and bonds, doing so is generally
• Roth IRA *
much riskier than sticking with mutual funds, so it’s not the
• SEP IRA
best choice for most investors. (For more, see the Quamut
• 401(k), 457(b), 403(b)
Aggressive Asset Allocation guides to Stock Investing and Mutual Fund Investing, avail-
• Roth 401(k), 457(b), 403(b) *
able in Barnes & Noble bookstores and online at www.
quamut.com). Roth IRA • Roth IRA
bonds 20% Below are a few guidelines to heed regarding retirement- • Roth 401(k), 457(b), 403(b)
large-cap stocks 40% account investment options beyond mutual funds.
SIMPLE IRA • Rollover IRA †
international stocks 25% • SIMPLE IRA
• Consider ETFs: ETFs (exchange-traded funds) are
small-cap stocks 15% • Roth IRA *†
similar to mutual funds, but they trade like individual • SEP IRA †
money market 0% stocks. They track many of the same indexes as index • 401(k), 457(b), 403(b)
mutual funds but often have lower expense ratios. • Roth 401(k), 457(b), 403(b) * †
• Avoid annuities: Annuities are tax-deferred
Rebalancing Your Investments savings plans offered by insurance companies. Since SEP IRA • Rollover IRA
Asset allocation has a major impact on long-term invest- retirement accounts provide tax-deferred growth, • Roth IRA *
ment performance, so it’s crucial to maintain the optimal there’s little benefit to owning an annuity within a • SEP IRA
allocation for your age. Because different types of invest- retirement plan account, especially since annuities • 401(k), 457(b), 403(b)
• Roth 401(k), 457(b), 403(b) *
ments tend to grow at different rates, you must rebalance often charge high annual fees.
your retirement assets (and any other investment accounts • Be wary of your company’s stock: If your company 401(k), 403(b), • Rollover IRA
you own) at least once a year. Rebalancing means selling offers you special incentives to invest in your or 457(b) • Roth IRA *
assets that have grown in value and then using those pro- company’s stock as part of your retirement plan, be • SEP IRA
ceeds to add to your slower-growing assets in order to bring prudent. Invest in your company’s stock only after • 401(k), 457(b) 403(b)
your asset allocation back in line with the ideal allocation for scrutinizing it as you would any other investment, and • Roth 401(k), 457(b), 403(b) *
your age group. If you don’t rebalance, your asset allocation never overweight your asset allocation with too much
Roth 401(k), • Roth IRA
can drift significantly out of line over time. of your company’s stock—or with any other single
403(b), or 457(b) • Roth 401(k), 457(b), 403(b)
investment, for that matter.
How to Select Investments
Once you’ve determined your asset allocation, you’re ready Should You Use an Investment Advisor? • Footnote *: Only if your adjusted gross income for the
to select investments to fill each slice of the pie. Most retire- If you’re a knowledgeable investing enthusiast who enjoys tax year does not exceed $100,000 and you are not
ment participants use mutual funds to build a portfolio in managing your own money, you may do well managing your married filing separately
line with their target asset allocation. retirement accounts yourself. But if you know little about in- • Footnote †: Only after you have participated in the
vesting and have no interest in learning much more about it, SIMPLE plan for two years
Picking Mutual Funds for Your Retirement Account then it’s probably worth the time and money required to hire
A mutual fund is a large investment portfolio managed by an investment advisor. These advisors charge commissions, How to Consolidate Retirement Plans
a professional manager. Most mutual funds own stocks or an hourly rate, or an annual fee based on the assets they To consolidate, you’ll need to contact the financial services
bonds, though some funds own a blend of both. All mutual manage. (For advice on how to find and select an investment firm that administers the plan into which you intend to com-
funds can be divided into two types: advisor, see the Quamut guide to Investing Basics, available in bine one or more other plans. From there, you’ll likely just
Barnes & Noble bookstores and online at www.quamut.com.) need to complete a few forms to initiate the consolidation.