Planning for Retirement: Introduction to IRAs and 401(k)s
"The question isn't at what age I want to retire, it's at what income."
Two of the greatest opportunities for retirement investing are IRAs and 401(k)s. Yet many people fail to take advantage of these gifts from Congress. And many of the people who do avail themselves of IRAs and 401(k)s fail to utilize them as best they can. Knowledge is power. Knowing how to maximize the benefits of these saving graces can help make your retirement so much better.
For Want of a Nail (IRA Style)
According to Benjamin Franklin in Poor Richard's Almanac, "For the want of a nail, the shoe was lost. For the want of a shoe, the horse was lost. For the want of a horse, the rider was lost. For the want of a rider, the battle was lost. For the want of a battle, the kingdom was lost. And all for the want of a horseshoe nail." Old Ben certainly had a way with words (and the ladies, too, but that is a subject for another time).
The lesson of this particular quotation is that small details are important. They can be particularly important when dealing with Individual Retirement Accounts. One of the important details that IRA owners neglect is failing to name contingent beneficiaries for their IRAs. A contingent beneficiary is the person designated to receive what is left in the IRA at the owner's death. Neglecting this little detail can dramatically affect the income tax levied on the money distributed from an IRA. Listing your spouse as a beneficiary gives your spouse the ability to roll over your IRA, at your death, into his or her own IRA and then withdraw the IRA funds based upon his or her own IRS determined life expectancy.
Based on the IRS Uniform Lifetime Table, this is 17 years for a 70-year-old. In this instance, then, a 70-year-old surviving spouse could either extend the tax deferral of a traditional IRA or avoid the full tax of a Roth IRA for another 17 years—and that, in turn, results in some considerable tax savings. (By the way, the IRS is even optimistic about the longevity of someone who is 107 years old: The IRS Single Life Expectancy Table gives this person 1.5 more years to take out his or her IRA money.)