Tax Tips & Calculators

Here are some common investments that can help extend retirement options.

Social Security

Your Social Security benefits are the foundation on which you can build a secure retirement. Most financial advisors say you'll need about 80% of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40% of your pre-retirement earnings. You'll need to supplement your benefits with a pension, savings or investments.

401(k) and 403(b) Plans

These plans let you save for retirement while deferring income taxes on the saved money and earnings until withdrawal. Many employers offer 401(k) plans to which you can contribute a percentage of each paycheck. Many companies even match up to a certain percentage of your contribution.

If your retirement plan is a section 401(k) or section 403(b), you may be able to get your money early if you face financial hardship. To qualify for a hardship withdrawal, you must prove the following:

• You have an immediate financial need such as medical bills, a down payment on a home or a rent payment to avoid being evicted.
• You don't have savings and you're unable to borrow from a bank.

Note, however, that any withdrawals you make will reduce the funds you have available at retirement.
The IRS may also impose other restrictions. Even if your retirement plan permits hardship withdrawals, distributions received before age 59½ are generally subject to the 10% early distribution penalty.

The early distribution penalty applies only to taxable amounts. It doesn't apply to amounts rolled over or amounts that are allocable to after-tax investments in the plan or IRA.

There are several exceptions to the penalty. For example:

• You're totally and permanently disabled.
• To the extent you have medical expenses that are more than 7.5% or your adjusted gross income
• You receive money from the plan after you separate from the service of your employer during or after the year in which you reach age 55 (age 50 for qualified public service employees).

For a complete list of exceptions, see Form 5329.

Individual Retirement Account (IRA)

An IRA is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRAs, which may be either employer-provided or self-provided plans.

• Traditional IRA. Contributions are often tax-deductible, and all transactions and earnings within the IRA have no tax impact. Withdrawals at retirement are taxed as ordinary income (except for the portion of the distribution attributable to nondeductible contributions). Owners must begin taking distributions by April 1 of the year after reaching age 70½. (There is an exception for 2009 required minimum distributions, however.)
• Roth IRA. Contributions are made with after-tax funds. All transactions within the IRA have no tax impact, and qualified withdrawals are tax-free. Distributions are not required beginning at age 70½, so a Roth IRA may allow you to pass on more to your heirs.

The maximum annual IRA contribution for 2009 is $5,000 if you're younger than 50. Individuals age 50 or older can contribute up to $6,000.

You can take money out of a traditional IRA at any time, but if you take it out before age 59½, you generally will have to pay a 10% early distribution penalty in addition to income tax.

Exceptions to the penalty include up to $10,000 used to purchase a first home, amounts up to the amount of qualified higher education expenses, amounts for medical expenses that exceed 7.5% of your adjusted gross income (even if you don't itemize), amounts up to the amount of your medical insurance premiums if you received unemployment compensation for at least 12 consecutive weeks, and amounts you withdrew because of permanent and total disability. See IRS Publication 590 for more detail about these exceptions.

Mutual Funds, Stocks & Bonds

As an investor in a mutual fund, you become a shareholder in a large portfolio of stocks, bonds and/or money market securities (or some combination of them). Investing in stocks and bonds can be a good way to achieve long-term capital growth, but the market risk can be substantial. Consider subscribing to financial magazine or taking a course to learn more about these items.

Although investments in mutual funds, stocks and bonds provide no current tax benefit, qualified dividends and capital gain distributions are taxed at a maximum rate of 15% and your other income is taxed at a maximum rate of 35%. For 2009 and 2010, these amounts are taxed at a 0% rate to the extent your taxable income is below the end of the 15% bracket.