Archives For Retirement

       While knowledge isn’t really a hindrance to success, you don’t need to know everything to accomplish your goals. After you reach a basic understanding of an area you want to be successful in, you need to start taking action. Continuing your learning after that point is wise, too. But if you never act on what you learn, you’ll never be successful.

First, Learn the Basics

       This is especially true in personal finance. You don’t have to be a seasoned financial planner to begin finding success. You don’t even need to spend a ton of time to understand the basics. They’re simple. Spend less. Earn more. Save and invest. Be wise and cautious when making purchases (goods, services, or investments). Plan ahead. Don’t pay things you don’t have to (like extra taxes). And so on. A basic education is all you need to start finding success in your personal finances.

       You don’t need an accounting degree to make a budget. You don’t have to be Warren Buffet to start investing. You don’t have to go to law school to get your estate documents in place.

Then, Take Action

       Success in personal finance is not necessarily about knowing all the right answers. It’s about taking action. Those who only read about the benefits of budgeting will never be as successful as those who actually try to make a budget and stick to it. This is true even if the doers are not successful the first time.

       You can learn by reading about the experiences of others – but only so much. Until you start creating your own experiences, the information will just be knowledge in your head. You must start using it yourself!

       Don’t think I’m discounting the value of learning, education, and research. To be truly successful, you’ll have to keep learning. But you can’t get started on the road to success unless you follow a pattern of learning, doing, learning, doing, and so on.

Avoid Danger Areas!

       I’ll end with a few cautions especially true in personal finance. In some areas of personal finance, there are unscrupulous people who will try to take advantage of your lack of education. Insurance, investing, and debt are the most common places you’ll run into this, but you can really find it anywhere. Here’s the key: Before doing something, make sure you’re aware of the possible problems/pitfalls and educate yourself on how to avoid them.

       Here’s an example. In investing and insurance, you must be aware of how advisors and salesmen get paid. If it’s commissions, know what conflicts of interest might exist. In other words, learn how people might try to rip you off and be on the lookout for those techniques.

       Even though there are risks to the learn, do, learn method, you can avoid most major mistakes by learning first about the danger areas and how to avoid them. In personal finance, be aware of those who earn commissions, learn the math of debt, and read the academic research on investing.

Now Do Something!!!

       So get out there and start doing the needed things to achieve success. Stop reading about budgeting and do it! Stop worrying about having enough for retirement and start saving! Stop dreaming of starting your own business and do it! You’re never going to get anywhere until you take action.

P.S. I think I wrote this as much for me as for anyone else. I have the curse of perfectionism, and I must battle it every day. There is no such thing as perfect in this world. Only God is perfect. So I need to stop worrying about doing everything perfectly and just start doing. What about you?

       A couple weeks ago a friend asked me how he could get out of paying Social Security taxes. He feels like there won’t be any Social Security for him when he retires, so he’d rather just save up the money himself. I had done some research on the same topic a couple years ago and I brushed up on it again recently. Here’s how you can get out of paying Social Security and Medicare taxes.

IRS Form 4029

       IRS Form 4029 is an application for exemption from Social Security and Medicare taxes and a waiver of benefits from those programs. However, there are a few catches:

  1. You must be a member of a religious group that teaches against insurance (for conscientious reasons – not because they believe it won’t be around to pay you benefits). This group must also provide a reasonable level of living for its dependent members. Finally, it must have existed continuously since December 31, 1950. It doesn’t matter if you think your group fits the description. It must be approved by the Social Security Administration. Generally, only the Amish and very conservative Mennonite groups will qualify for this specific form. I’m part of a Mennonite church and I don’t think we’d even qualify (unless the SSA knows little about the differences among Mennonites).
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  3. You’re giving up all rights to any benefits you’d be entitled to under Social Security or Medicare. So you better be ready to replace its purpose in terms of life insurance, retirement income, disability insurance, and medical insurance. While that’s no small task, my rough calculations show you’d probably be better off doing those things yourself if you’re young and make more than $30,000/year.
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  5. This exemption only applies to your self-employment earnings and earnings from employers who also qualify for this exemption. Qualifying employers will be limited to individuals, partnerships, some LLCs, and religious organizations. If you work for a corporation (C or S), this won’t do you much good. Unless, of course, you’re paid as an independent contractor and issued a Form 1099-MISC, in which case you’d be filing Schedule C and be subject to self-employment taxes.
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  7. As soon as you are no longer eligible, this exemption ends. So if you leave your religious group or if the SSA determines your group no longer qualifies, you’re back to square one. However, you can become eligible for Social Security and Medicare benefits once the exemption no longer applies.

       Basically, not many people will qualify and the exemption is fairly limited (in terms of compensation affected). However, there is another form that serves a similar purpose, but it is even more limited than this one.

IRS Form 4361

       IRS Form 4361 is an application for exemption from self-employment taxes for ministers, members of religious orders, and christian science practitioners. Again, there are quite a few limitations:

  1. You must be an ordained, commissioned, or licensed minister for a church, a christian science practitioner, or a member of a religious order who has not taken a vow of poverty (like people who work for a monastery or convent but are not monks or nuns). That’s a narrow list.
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  3. You have to be conscientiously opposed or have religious beliefs that are opposed to receiving benefits from public insurance based on the performance of your duties as a minister, christian science practitioner, or member of a religious order.
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  5. This exemption only applies to your earnings in that role. If you have another job, you’ll still have to pay Social Security and Medicare taxes on those earnings and you’ll be eligible for benefits based on those earnings.

       Again, this exemption is very limited in terms of who qualifies and in its scope.

The Rest of Us Will Just Have to Deal with It

       There are no other ways to remain a U.S. Citizen and not pay Social Security and Medicare taxes unless you’re willing to move out of the country. But the real question is whether Social Security will actually run out of benefits by the time today’s young people retire. Everyone bases the idea that Social Security won’t be around on the intermediate projection in the 2008 Trustees Report. But you need to realize three things:

  1. These are projections based on assumptions. There are no guarantees. People are estimating what they think will happen and running scenarios based on numerous variables. There is much room for error in these calculations.
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  3. Even under these projects, Social Security can still pay 75-78% of scheduled benefits. That’s not great news, but it’s not the end of Social Security either.
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  5. The “fixes” needed are relatively simple and not very drastic either. An increase in the Social Security tax, delay in retirement age, reduction in benefits, or a combination of all three could easily change the projections. In fact, a combination of all three solutions would probably be quite beneficial and have only a slight impact on individual situations.

       With that said, I’m still not a huge proponent of the system and I’d gladly save on my own if I had the option. But Social Security was put into place partly because people don’t save on their own. If the current state of personal finances in America is any indication, we’d likely have millions of poverty-stricken elderly due to a lack of financial discipline.

       This is just a simple one-stop resource to help you find out the contribution limits for various retirement plans. Click any of the following links to find the contribution limits for the corresponding retirement plan.

       To my regular readers: Thanks for putting up with these posts as I’ve been adding this information to the website!

SEP-IRA Contribution Limits

Corey —  April 6, 2010

Contribution Limits

       You cannot contribute directly to a SEP-IRA. However, your employer can contribute on your behalf. If you are self-employed, then this article will help you figure out the maximum you can contribute for yourself. The maximum amount you can contribute to a SEP-IRA depends only on your compensation. These are the correct SEP-IRA contribution limits for 2009 and 2010. Contributions to other qualified retirement plans (401(k), 403(b), SIMPLE, or SEP) will count toward this limit.

  • Up to 25% of your compensation, but not more than $49,000 total

Deadline for Contributions

       The deadline for contributions to SEP-IRAs is the same as the tax deadline for your employer. If you are self-employed, the deadline is April 15th. Otherwise, the deadline is generally March 15th unless you are on a fiscal year tax deadline. Any tax return extensions you file will also extend the deadline for SEP-IRA contributions.

Tax Deduction for Contributions

       SEP-IRA contributions are deductible by your employer (or if you’re self-employed, by your business or on Schedule C). You receive no deduction on your tax return for contributions made on your behalf to a SEP-IRA. These contributions are not eligible for the Retirement Savings Contribution Credit.

SIMPLE IRA Contribution Limits

Corey —  April 5, 2010

Contribution Limits

       The maximum amount you can contribute to a SIMPLE IRA depends on your age. These are the correct SIMPLE IRA contribution limits for 2009 and 2010. Contributions to other qualified retirement plans (401(k), 403(b), SIMPLE, or SEP) will count toward this limit. You cannot contribute more than 100% of your income.

  • Under age 49 at the end of the year: $11,500
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  • Age 50 or older by the end of the year: $14,000

Deadline for Contributions

       Elective contributions are generally made from your paycheck, so you need to have your contributions set up within the year. You can choose to contribute everything at the beginning of the year if your plan allows it, or you can just contribute a certain amount or percentage from each paycheck.

Tax Deduction for Contributions

       SIMPLE IRA contributions reduce your taxable income, so you don’t need to take a tax deduction on your return. However, you may be eligible for the Retirement Savings Contribution Credit.

457 Plan Contribution Limits

Corey —  April 2, 2010

Contribution Limits

       The maximum amount you can contribute to a 457 plan depends on your age and the details of the plan. These are the correct 457 plan contribution limits for 2009 and 2010. Contributions to qualified retirement plans (401(k), 403(b), SIMPLE, or SEP) do not affect your 457 plan contribution limits. You cannot contribute more than 100% of your compensation.

  • Under age 49 at the end of the year: $16,500
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  • Age 50 or older by the end of the year: $22,000 (only in governmental 457 plans, otherwise the limit is $16,500)

Special 457 Plan Catch-up Contributions

       If you are within 3 years of normal retirement age as defined by the 457 plan, you may be eligible to contribute up to an additional $16,500 per year. However, this special catch-up contribution is limited to your unused regular contribution limits from previous years. If you’ve contributed the maximum every year you’ve been in the plan, you won’t qualify for this special catch-up contribution. For more information, be sure to speak with your human resources department and consult the IRS website here and here.

Deadline for Contributions

       Elective contributions are generally made from your paycheck, so you need to have your contributions set up within the year. You can choose to contribute everything at the beginning of the year if your plan allows it, or you can just contribute a certain amount or percentage from each paycheck.

Tax Deduction for Contributions

       Your contributions to a 457 plan reduce your taxable income, so you do not need to claim a tax deduction on your return. However, you may be eligible for the Retirement Savings Contribution Credit if you contributed to a governmental 457 plan. Non-governmental 457 plan contributions will not qualify for that credit.

403(b) Plan Contribution Limits

Corey —  April 1, 2010

Contribution Limits

       The maximum amount you can contribute to a 403(b) plan depends on your age and years of service. These are the correct 403(b) plan contribution limits for 2009 and 2010. This limit can be split between multiple qualified retirement plans (401(k), 403(b), SIMPLE, or SEP), but the combined total of your contributions cannot exceed this limit. You cannot contribute more than 100% of your compensation.

  • Under age 49 at the end of the year: $16,500
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  • Age 50 or older by the end of the year: $22,000

15 Year Rule

       If you have 15 years of service with a qualified organization, you may be eligible to contribute up to an additional $3,000 per year to your 403(b) plan. However, the rules for this can get tricky, so you should speak with the human resources department at work and read the IRS explanation of the 15 year rule.

Deadline for Contributions

       Elective contributions are generally made from your paycheck, so you need to have your contributions set up within the year. You can choose to contribute everything at the beginning of the year if your plan allows it, or you can just contribute a certain amount or percentage from each paycheck.

Tax Deduction for Contributions

       Your contributions to a 403(b) plan reduce your taxable income, so you do not need to claim a tax deduction on your return. However, you may be eligible for the Retirement Savings Contribution Credit.