Quote of the Month

"Success on any major scale requires you to accept responsibility... in the final analysis, the one quality that all successful people have... is the ability to take on responsibility." Michael Korda

RSG welcomes you to the March 2003 edition of The Retirement Strategist. We hope you enjoy our actionable ideas for implementing a better retirement stategy. Remember that time can be your greatest friend; the sooner you implement excellent retirement savings ideas, the better.

1. Questions From Members
2. Timely Investment Tip$: Funding Your IRA for Tax Season
3. Fiscal Therapy: Why Every Business Owner Should Offer A Retirement Plan
4. Retirement Strategies Group Service Highlight: How We Can Help You

QUESTIONS FROM MEMBERS

Q.	My company does not offer a match for the 401(k) plan. Is it better to invest in a Roth IRA and put any extra savings into a tax-efficient mutual fund account?
A.	A Roth IRA is better than a deductible contribution to a 401(k) only if you expect your tax bracket at retirement to be higher than it is now. Otherwise, you are probably better off putting the money in the 401(k) to get the tax break up front plus the tax-deferred growth. However, you may want to consider the Roth IRA and tax-efficient mutual funds option if you're not satisfied with the investment choices in your 401(k) plan. Developing a private portfolio separate from your company-sponsored plan gives you the added freedom of picking your own investments within the portfolio. In a company-sponsored plan, you're only allowed to choose from the options given to you by the plan sponsor. Another factor to consider is whether you have the discipline to save the same amount if it isn't deducted from your paycheck. Most employees are unable to maintain the same rate of savings when they attempt to save outside of their 401(k) plan.

TIMELY INVESTMENT TIP$

Funding Your IRA for Tax Season

With April right around the corner the topic of taxes can be heard in households around the country. First and foremost, tax planning is a crucial issue that must be addressed and handled accurately to ensure that every person takes advantage of tax benefits available.

When the government put retirement planning in the hands of the individual by virtually eliminating pensions and moving towards a defined contribution platform, such as 401(k)'s and IRA's (Individual Retirement Accounts), April became a much greater date than just filing for taxes. What it now represents is your deadline for IRA contributions! Whether you have a Roth IRA or a Traditional IRA, you have until April 15th to make your annual contributions to your IRA.

How significant is this? Every year you miss is one year less you have available to fund your retirement plan. The month of April represents the deadline for contributions. You always have until the following April to make last years contributions. When you look at how powerful compounding interest is on your portfolio you realize the significance of this date.

Here's an example: Suppose a 30-year-old starts contributing to an IRA ($2,000 a year) for 30 years, until retirement, earning a modest 10% rate of return. When this individual reaches age 60, their IRA will be worth $361,886. Assume this same person started their contributions on April 20th, thus losing a year of eligibility to an IRA. S/he now has only 29 years to contribute to an IRA. At age 60, the IRA would be worth $326,988. By missing the IRA deadline it cost the retirement portfolio $34,898. That's a hefty price to pay for missing one year of $2000 in contributions. The numbers are even more shattering when two individuals are married and are eligible for a $4,000 IRA contribution. So, if you haven't yet contributed the maximum amount to your IRA for the year 2000, you still have time to deposit that $2000.

In today's self-directed retirement planning world don't let April represent only taxes, but also a date to move one step closer to retirement.  

Why Every Business Owner Should Offer a Retirement Plan

To offer a retirement plan or not to offer a retirement plan? That is the question. As a business owner, offering a 401(k) or other type of qualified retirement plan has many advantages.

1. Employee Retention.  The company that saves together, stays together! Employers that offer a retirement plan have a 92% higher retention rate of quality employees.



2. A Simple Way to Save.  Investing in a company-sponsored retirement plan is simpler than balancing a checkbook, more convenient than saving at a bank, and easier than investing through a brokerage. Best of all, when you retire, it should pay more than you'll get from Social Security.



3. Professional Money Management.   When investing through a company-sponsored retirement program, each investor will have available to them the advantages of professional money management, not to mention a range of attractive investment options.



4. Tax Savings.   Never turn down an interest free loan from Uncle Sam! Money invested in your 401(k) consists partially of the taxes you would otherwise owe from each paycheck. Uncle Sam is essentially lending you money to invest and pay back many years in the future. For example, if you contribute the maximum of 15% into your retirement account and your monthly pay is $6,000, you would be contributing $900 per month. Your net taxable amount for the month is then $5,100, saving you $306 per month in taxes. That equals out to $3,672 per year in tax savings (34% tax bracket).



5. Tax-deferred Growth.   A dollar not paid in taxes is a dollar earned! Since you don't pay taxes on your 401(k) earnings until you withdraw money at retirement, you'll accumulate savings faster. Tax-deferred growth gives you the full benefit of compounding growth. Every year the full amount of your investment grows without interruption from the IRS. If you were 40 years from retirement and begin contributing $2,000 per year to a 401(k), that money would grow quickly. Let's assume an annual return of 10% on your investment, and that you contribute faithfully every year. At the end of 40 years, you would have contributed a total of $80,000. Amazingly, however, your 401(k) account would be worth $973,684, and it's all thanks to the power of tax-deferred compounding!



6. Savings at the Corporate Tax Level.  As a business owner you have many ways of customizing the plan to fit your needs. If you want to maximize the plan for your benefit ($35,000 or 25% per year) you can offer a profit sharing plan, matching, and a short- or long-term vesting schedule. All of this is up to your discretion.

   Example: A RSG specialist was recently handling a 401(k) plan that would allow the owners to maximize their contributions per year and reduce corporate tax liability. With professional guidance we found a way to get $35,000 into each of their 401(k)/Profit Sharing accounts - a total of $105,000. The business owners alone saved over $35,700 in taxes per year. They had 8 employees with contributions of 3% to all. The contribution added on more savings in the amount of $8,500 in taxes. All of this hard work paid off with a total tax savings of $44,200.

You have already taken the first step in requesting to receive our monthly e-bulletin. If you would like additional information including a free review of your current portfolio, information on brokerage services, mutual funds, tax-deferred annuities, or have a question on a specific financial program, please contact Retirement Strategies Group.