Retirement

There are a number of types of retirement plans, each of which may be funded with mutual fund shares.

 

 

Wage-earners under the age of 70 1/2 may set up an Individual Retirement Account (IRA). The individual may contribute as much as 100 percent of his or her compensation each year, up to $2,000. Earnings are tax-deferred until withdrawal. The amount contributed each year may be wholly or partially tax-deductible. Under the Tax Reform Act of 1986, all taxpayers not covered by employer-sponsored retirement plans can continue to take the full deduction for IRA contributions. Those who are covered, or who are married to someone who is covered, must have an adjusted gross income of no more than $25,000 (single) or $40,000 (married, filing jointly) to take the full deduction. The deduction is phased out for incomes between $25,000 (single) or $40,000 (married, filing jointly) to take the full deduction. The deduction is phased out for incomes between $25,000 and $35,000 (single) and $40,000 and $50,000 (married, filing jointly). An individual who qualifies for an IRA and has a spouse who either has no earnings or elects to be treated as having no earnings, may contribute up to 100 percent of his or her income or $2,250 whichever is less.

 

 

SEPs are employer-sponsored plans that may be viewed as an aggregation of separate IRAs. In an SEP, the employer contributes up to $30,000 or 15 percent of compensation, whichever is less, to an Individual Retirement Account maintained for the employee. SEPs established for employers with 25 or fewer employees may contain a "cash or deferred" arrangement allowing employees to make additional elective salary deferrals to the SEP. The cash-or-deferred arrangement for smaller employers is called a SARSEP, for "salary reduction SEP."

 

 

Tax-qualified pension and profit-sharing plans may be established by corporations or self-employed individuals. Changes in the tax laws have made retirement plans for employees of corporations and those for self-employed individuals essentially comparable. Contributions to a plan are tax-deductible and earnings accumulate on a tax-sheltered basis. The maximum annual amount which may be contributed to a defined contribution plan on behalf of an individual is limited to the lesser of 13 percent of the individual's compensation or $30,000.

 

Section 403(b) of the Internal Revenue Code permits employees of certain charitable organizations and public school systems to establish tax-sheltered retirement programs. These plans may be invested in either annuity contracts or mutual fund shares.

 

 

One particularly popular type of tax-qualified retirement plan which may be offered by either corporate or non-corporate entities is the 401(k) plan. A 401(k) plan is usually a profit-sharing plan that includes a "cash or deferred" arrangement. The cash-or-deferred arrangement permits employees to have a portion of their compensation contributed to a tax-sheltered plan on behalf, or paid to them directly as additional taxable compensation. Thus, an employee may elect to reduce his or her taxable compensation with contributions to a 401(k) plan where those amounts will accumulate tax free. Employers often "match" these amounts with employer contribution. The Tax Reform Act of 1986 established new, stringent anti-discrimination requirements for 401(k) plans and curtailed the amount of elective deferrals which may be made by all employees. Nevertheless, 401(k) plans remain very good and popular retirement savings vehicles.

 

 

Section 403(b) of the Internal Revenue Code permits employees of certain charitable organizations and public school systems to establish tax-sheltered retirement programs. These plans may be invested in either annuity contracts or mutual fund shares.

 

 

Source: Mutual Fund Fact Book, Investment Company Institute, Washington, DC, 1993.