• Don’t borrow from your retirement plan or permanently withdraw funds be fore re tire ment un less absolutely necessary.
• Your retirement plan may allow you to borrow from your account, often at very at trac tive rates. However, borrowing reduces the account’s earnings, leaving you with a small er nest egg. Also, if you fail to pay back the loan, you could end up pay ing income tax es and pen al ties. As an alternative, consider budgeting to save the need ed money or pur sue other af ford able loan options.
• Also avoid permanently withdrawing funds before retirement. This often hap pens when peo ple change jobs. According to a study by the Employee Benefits Research Institute, 46 per cent of workers changing jobs rolled over into an IRA or a new employer’s re tire ment plan at least some of the money they received from their former em ploy er’s re tire ment plan.
• Pre-retirement withdrawals reduce the ultimate size of your nest egg. In ad di tion, you’ll prob ably pay federal income taxes on the amount you withdraw (10 per cent to as high as 35 percent) and a 10 percent penalty may be tacked on if you’re younger than age 59½. In addition, you may have to pay state taxes. If you’re in a SIMPLE IRA plan, that ear ly withdrawal penalty climbs to 25 per cent if you take out money during the first 2 years you’re in the plan.
Consider an annuity. An annuity is an agreement
with an insurance company in which you pay money
in return for its paying either a regular fixed amount
when you retire or an amount based on how much
your investment earns. There is no limit on how much
you can invest in a private annuity, and earnings aren’t
taxed until you withdraw them.
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However, annuities present com plex
is sues regarding taxes, fees, and
with drawal strategies that may not
make them the best investment
choice for you. Consider discussing
this type of in vest ment first with a
financial plan ner.
Build your personal savings. You can
always save money on your own, either
in mutual funds, stocks, bonds (such
as U.S. Savings Bonds), real estate,
CDs, or other assets. It’s best to mark
these investments as part of your
retirement fund and don’t use them
for anything else unless absolutely
necessary.
Investing in an IRA, an
annuity, or in personal savings
means you are totally responsible
for directing your own investments.
How conservatively or aggressively
“Keogh”. “Keoghs” are more complicated to set up and
you invest is up to you. It will depend in part on how
maintain, but they offer more advantages than a SEP.
willing you are to take investment risks, your age, the
For one thing, they come in several varieties. Some of
stability of your job, and other financial needs. Learn
the varieties allow you to sock away more money —
as much as you can about investing and about specific sometimes a lot more money — than a SEP.
investments you are considering. You also may want
SIMPLE IRA. Described earlier under employer-based
to seek the help of a professional financial planner.
retirement plans, a SIMPLE IRA can be used by the
Go to www.LetsMakeAPlan.org for tips on choosing a
self-employed. However, generally you can’t save as
financial planner who puts your interests first.
much as you can with a SEP or “Keogh”.
What To Do If You Are Self-Employed
IRA. Usually you are better off funding a SEP or a
“Keogh” unless your self-employment income is small.
Many people today work for themselves, either full
Annuities. See annuities under the section on “What
time or in addition to their regular job. They have
to Do if You Can’t Join an Employer-Based Plan.”
several tax-deferred options from which to choose.
SEP. This is the same type of SEP described earlier
under employer-based retirement plans. Only here,
you’re the employer and you fund the SEP from your
earnings. You can easily set up a SEP through a bank,
mutual fund, or other financial institution.
U.S. Department of Labor Employee Benefits Security Administration 23
SAVINGS FITNESS A GUIDE TO YOUR MONEY AND YOUR FINANCIAL FUTURE