Individual Retirement Accounts (IRAs) — Self-Funded Retirement Plans
You might find saving through an employer easy and convenient. If you never see the money you save in your paycheck, you don’t miss it! Saving on your own takes a bit of discipline, but even small amounts saved add up over time.
Individual Retirement Accounts (IRAs) are a type of self-funded retirement plan. Here, you open the account on your own through a bank, credit union, or investment firm. You fund the plan with your “after tax” savings, rather than the “pre-tax” income from your earnings or from your employer’s matched funds.
The IRS regulates how much you may contribute to an IRA each year. Allowable amounts will change over time. At the time this publication was written (2010), the maximum allowable contribution amounts:
- If you are under 50 years of age, is $5,000 per year
- If you are over 50 years of age, is $6,000 per year
Each year, you can contribute any amount up to the maximum amount. And, you can contribute at any time during the year. Because of the IRA tax benefits (see next section), the deadline for making contributions is tied to the date by which your income tax returns must be filed. For example, IRA contributions for 2011 must be made by April 15, 2012.
Types of IRAs
There are two types of IRAs you need to know about, the Traditional IRA and the Roth IRA. Rules about these plans change over time. Before you open an IRA, speak with someone knowledgeable about these plans, such as a bank or credit union representative or trusted financial advisor, to find out what rules apply.
Traditional Individual Retirement Account (IRA)
The Traditional IRA was the first type of IRA to be established. Contributions you make to these types of plans:
- Can lower your taxable income by the amount of your contribution, if your income doesn’t exceed a certain amount. If it does, you may still be able to lower your taxable income, but only by a portion of the amount you contribute. Contact your bank or credit union representative or trusted financial advisor to find out what the current income limitations are, as they change over time. You can also find out that information on the IRS Publication 590. Visit www.irs.gov and search for “Publication 590.”
- Will grow tax free until you begin withdrawing from the plan at retirement. The earliest you may withdraw funds without penalty is at age fifty-nine and one half.
- Will be taxed at when you withdraw the funds at retirement, and at the then current income tax rate.
This IRA is named after the last name of the Senator who introduced it in 1997. Contributions you make to these types of plans:
- Will not lower your taxable income.
- Will grow tax free.
- Will not be taxed when you withdraw the funds at retirement. With very limited exceptions, the earliest you may withdraw funds without penalty is at age fifty-nine and one half.
Special Needs — Special Consideration for the Roth IRA
For parents of children with special needs, the Roth IRA may provide a needed benefit. If you plan on making your child’s special needs trust the beneficiary of your IRA, the funds distributed to the special needs trust upon your death are not taxed. This could be one way to make the most of your money for the benefit of your child. The trade-off is that you don’t get a tax benefit when you make the contribution, as you do with the traditional IRA.
Penalty for Early Withdrawals
If you make a withdrawal before the age of fifty-nine and one half, you will pay twice: once with a 10 percent early withdrawal penalty and then again with federal and state income taxes on the amount withdrawn.
Exceptions to the Penalty
The IRS allows you to make an early withdrawal from your IRA account without penalty for these situations:
- You have unreimbursed medical expenses that are more than seven-and-a-half percent of your adjusted gross income
- You are disabled
- You are the beneficiary of a deceased IRA owner
- You use the withdrawal to buy, build, or rebuild a first home
- You use the withdrawal to finance a college education
The IRS places strict conditions on these exceptions. For example, withdrawal amounts cannot be more than the costs of your medical insurance or college education (if applicable).
If you think you might need to withdraw funds from your IRA account before you turn fifty-nine and one half, speak with someone knowledgeable about these exceptions to early IRA withdrawals, such as a bank or credit union representative or trusted financial advisor, to find out how they might apply to you. Also take a look at the considerations for hardship withdrawals from employee benefit plans they apply here, too.
Learn More About Early Withdrawals from Retirement Plans
In addition to speaking to a representative at your bank or credit union, or to your trusted financial advisor about IRS rules for early withdrawals from retirement plans, you can explore the IRS Web site directly.
Call 1-800-829-1040 (Voice) or 1-800-829-4059 (TDD)
Visit www.irs.gov and search on “hardship distributions” or “IRA, early withdrawals”.
Personal Investments and Savings
The more you can save for the future, the more financially secure it will be for you and your child. Many financial advisors suggest investing your personal savings in stocks, bonds, or mutual funds for long-term financial goals, such as retirement. What you decide to invest in depends on an assessment of what your financial needs will be at retirement and your tolerance for risk. Speak with a trusted financial advisor for help in selecting appropriate investments for the personal savings you’d like to use for retirement.
Your Long-Term Care
Predicting how much assistance you’ll need with day-to-day living activities in your elderly years and how much it will cost is difficult—there are many unknowns. Planning to pay for any long-term care you might need out-of-pocket can be risky—its cost may turn out to be far more expensive than you anticipated. Should that occur, you risk the future of your own well-being along with your ability to care for an adult child with ongoing special care needs.
Long-term care insurance policies offer a variety of benefits that assist the elderly with activities of daily living (ADL). Long-term care options include coverage for in-home care, assisted living, hospice care, and nursing home care. Speak with a trusted financial advisor on whether purchasing long-term care insurance is right for you.
Why Purchase Long-Term Care Insurance?
Did you know that Medicare does not pay long-term care expenses associated with day-to-day living activities? Medicare is a form of government health care assistance that covers some hospital, medical, and prescription drug expenses, but not expenses associated with long-term daily living activities. Long-term care insurance does.
Another consideration is whether a child of yours without disabilities may take on the roll of caregiver of your child with special needs. If that occurs, your child-caregiver may not be available to tend to your needs during your elder years.
Along with protecting your and, potentially, your child’s well being, long-term care insurance helps you also protect and retain your assets that you need to support yourself, your spouse (if applicable), and your child’s additional needs. What assets remain after you die can be passed on to heirs and your child’s special needs trust.
Choosing a Long-Term Care Insurance Product
Many factors need special consideration when selecting long-term care policy options and evaluating their costs. People are living longer than in the past, which might have some bearing on the level of benefits you ultimately receive. Take extra care in choosing a long-term care product. Ideally, seek the advice of a trusted financial professional experienced in issues related to children with disabilities.
How Much Does Long-Term Care Insurance Cost?
Health care costs rise over time (you may know that all too well). At the time of this publication’s writing (2010), one year in a nursing home can cost $60,000. (see “Talking About Medicare: Your Guide to Understanding the Program, 2009—Long Term Care.” The Henry J. Kaiser Family Foundation. Retrieved from http://www.kff.org/medicare/7067/med_longterm.cfm August 30, 2010). The average hourly rate for an in-home health aid is $21 per hour. If you figure an aid’s assistance for five hours a day, your monthly cost for in-home care would be about $3,150 per month (see The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs.” MetLife Mature Market Institute. 2009. Retrieved from www.metlife.com on September 26, 2010.).
Your actual cost to purchase long-term care insurance depends on your age, what benefits you want or need, how long you think you’ll need to receive them, and the length of time you are willing to wait until benefits begin. You can receive long-term care in an assisted living center, through adult day care and in-home services, or in a nursing home.
As with any type of insurance, carefully read the policy and compare it to long-term care insurance policies before purchasing. In certain circumstances, you may be able use the premium amounts as a deduction on your income tax return.
Learn More About Long-Term Care Insurance
The U.S. Department of Health and Human Services’ web site on long-term care insurance provides information on:
- Long-term care insurance options
- Coverage and benefit choices
- Buying long-term care insurance
- Partnerships with state long-term care insurance programs
The article, Long-Term Care Insurance Introduction, on the www.LifeHappens.org web site provides information on:
- How to determine if you need long-term care insurance
- How much it costs
- Where to get long-term care insurance
The type of care you’ll receive.
The Federal Citizen Information Center provides the Guide to Long-Term Care Insurance published by America’s Health Insurance Plans (www.ahip.org ). Get a copy of this guide for more information on what long-term care insurance is, how much it costs, and what it covers. As of 2010, the publication cost is $2. Call the toll-free number below for the current cost. You’ll need to send a check or money order for the amount.
Call 1-888-878-3256, ask for publication number 579V
Visit www.pueblo.gsa.gov/ and search for the name of the publication
Get more information on what Medicare is and the benefits it offers. Visit www.Medicare.gov .