Part 2 of a 5-part series
Posted July 6, 2011
Your retirement planning strategy can seem very daunting with no idea where to turn. Over the next 5 weeks, we will break down the basic (and not so basic) tenets you must know to save and stretch your wealth during (and after) your retirement years, courtesy of the alphabet.
This week we present retirement planning F-J.
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Find out if your state has any special rules regarding IRAs. Although the federal rules regarding the taxation of IRAs and other retirement accounts are uniform from state to state, many states modify these rules for their own income taxes. Sometimes these changes are beneficial for taxpayers, other times they are not. For example, some states don't offer IRA deductions even though a federal deduction may be received. On the other hand, some states allow state-income-tax-free distributions (up to specified amounts) annually for certain taxpayers, even when those distributions are taxed at the federal level. Creditor protection of IRAs, which is also a concern for some people, is also determined at the state level.
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Get a copy of your 401(k)—or other employer plan—summary plan description. The summary plan description will tell you about the basic features of your plan. Does your company offer a match? Do they offer a Roth 401(k)? When can you access your money? The summary plan description should provide you with these answers and more. By knowing your plan's provisions, you can better determine how much and where you should be making your retirement contributions.
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Help children and grandchildren get focused on saving for retirement at an early age. Over the years, numerous studies have showed that people who develop good money habits early in life are more financially successful as they get older. You can also consider making IRA or Roth IRA contributions for a child or grandchild if they have earned income. Even small contributions made at a young age can add up to big savings at retirement thanks to the long time they have to grow and compound. In fact, Einstein, most famous for his work with the awesome power of gravity and the equation E = mc2, once called the power of compounding interest the most powerful force in the universe.
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Involve yourself in your finances. While some people are do-it-yourselfers and will never seek help or ask for advice, others turn their financial affairs over to advisors or loved ones without ever giving them a second look. In truth, the best approach probably lies somewhere in between. It's important to know your limitations and to seek help when necessary, but never lose fact of the sight that it's your money and your retirement at risk. No one can possibly care about that more than you.
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January is an ideal time to make your annual IRA contributions. Although the Tax Code allows you to make your IRA contributions up to April 15th of the year following the calendar year you're making the contribution for (i.e. April 15, 2012 for a 2011 contribution), making the contribution at the start of each year is a far better approach. Not only will you avoid silly mistakes such as forgetting to make the contribution or sending it in too late, but by making the contribution in January (as opposed to the following April) each year, you actually get over an extra year of compounding on all your contributions. Over time that adds up. January is also a good time to set any additional planning goals you want to accomplish for the year.
Ed Slott and Company has been called "The Best" source for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. Get more IRA information from America's IRA Experts.