Newsletter for July 2001

Article Briefings
401(k) Accounts Are Losing Money for the First Time
Women Need to Save More for Retirement
Getting Most From Tax Cut Takes Work
Tax Bill Makes Roth IRAs Even Better
What Financial Advisors Do

Featured Question
On the Horizon: Increases to IRA Contribution Limits

Resource Links
Social Security Administration
State-Sponsored College Savings Plans

401(k) Accounts Are Losing Money for the First Time
By Danny Hakim, New York Times: Vol. 14, No. 6, Pg. A1, 07/09/01.

The average 401(k) retirement plan lost money last year, despite thousands of dollars in new contributions and some recent strengthening of stocks. This new trend, which marks the retirement vehicle's first decline in its 20-year history, is exposing mistakes made by employees. Employees cannot control such factors as stock market declines and company contributions that shrink profits. However, shifting account balances over the last decade point to a nation of workers that have contributed too much into a single aggressive mutual fund, grown too dependent on stocks, or both. According to a report from Cerulli Associates, a benefits consulting firm, the average 401(k) account fell from $46,740 in 1999 to $41,919 in 2000. Since that time, says one Cerulli analyst, rough projections show that the average account has shrunk $600 more, to approximately $41,300.

Women Need to Save More for Retirement By Kathy Kristof, Philadelphia Inquirer: Vol. 14, No. 6, Pg.E5, 07/03/01.

Women need to get serious about saving for retirement, according to Los Angeles Times columnist Kathy Kristof. Women often must consider different variables than men when planning for retirement, and those variables often mean women need an earlier start in their savings. Unlike most men, women often interrupt their careers to raise a family, and thus lose valuable saving years. Women also tend to earn less and live longer than men. That's why financial experts say it is imperative that women get an early start in retirement savings. According to Kristof, more information is now being disseminated to educate women on retirement planning. The Social Security Administration, for example, has a web site (www.ssa.gov/women) that specifically addresses women and retirement issues.

Getting Most From Tax Cut Takes Work By Christine Dugas and Sandra Block, USA Today: Vol. 21, No. 5, Pg.3B, 06/08/01.

In June, President Bush signed new tax legislation that will bulk up retirement funds through increased contribution limits, but only if people are careful about maximizing their benefits. The contribution amounts for Roth or traditional IRAs will increase to $5,000 per year by 2008, while employee contributions to 401(k) plans will increase to $15,000 per year by 2006. However, highly paid workers will only be able to make contributions to 401(k)s that are within 2 percent of those contributions made by lower-paid employees. Though the new law allows employers to provide employees with a Roth 401(k) plan, few, if any, will opt for it because of bookkeeping hassles that require the employer to separate pre-tax contributions from after-tax contributions, which are tax-free upon withdrawal. However, employees that are at least 50 years old will be able to contribute more to their retirement plans due to the catch-up rule. Individuals seeking the best retirement plan have to remember that there are advantages and disadvantages to the 401(k) and the Roth IRA plans. Roth plans have no minimum distribution rules, money can grow tax free, and they have no restrictions on investment options, but 401(k)s often have matching employer funds, reduce taxable income, and allow individuals to borrow against plan assets.

Tax Bill Makes Roth IRAs Even Better By Neil Downing, Providence Journal: Vol. 21, No. 5, Pg. 3B, 06/02/01.

Roth IRAs have always been an excellent way to make tax-free withdrawals. Starting this year, a new tax bill recently passed by Congress will enable persons aged 50 or older to make even more of their Roth IRA savings. In addition to general, scheduled increases in contribution limits, people aged 50 and older will also be able to add "catch up" contributions. The maximum amount for these catch-up contributions will first be $500, and will eventually be as high as $1000 annually. Catch-up provisions, says Patricia Thompson, of the American Institute of Certified Public Accountants, will "allow the taxpayer to set more aside for retirement, and would let him do it in the year he has the money while he's working." In addition, the recent changes in the federal estate tax make Roth IRAs one of the more effective methods for transferring wealth to the next generation.

What Financial Advisors Do
By Richard J. Weikart, Advisor Today: Vol. 96, No. 6, Pg. 14, 06/01.

Financial planning should be an in-depth process that begins with establishing a working relationship with the client, argues Richard J. Weikart of LUTC. The CFP Board's six-step process for financial advising begins with establishing a working relationship with the client. The advisor must explain the issues surrounding the planning process, the services he or she will provide, and what is expected of the client. The second step involves identifying a client's goals, timelines, and tolerance for risk. In the third step, an advisor should analyze a client's current financial situation using cash flow projections, balance sheets, tax returns, existing insurance, employee benefits, investment summaries, and other available documents. In the fourth step, the advisor makes recommendations based on both values and risk tolerances. In the fifth step, the advisor implements the program. The sixth and final step of the financial advising process involves a regular review of the program.

Q. I've heard that IRA contribution limits are changing under the new tax law. What are the new limits and when will they take effect? Will they apply to everyone?

A. Until the recent Tax Relief Act was passed, the annual contribution limit for IRA's had remained at $2,000 since 1981. Now, beginning in 2002, the contribution limit will increase over the next seven years, until it reaches $5,000 in 2008. Adjustments for inflation will be made thereafter. Individuals who are age 50 or older will also have the option of making additional "catch-up" contributions. The term "catch-up," however, is a bit misleading - eligibility for the increased limit is based solely on the person's age, not the amount of his or her past IRA contributions. For 2001, the annual limit remains at $2,000. Scheduled increases are as follows:

Tax Years Under age 50 Age 50 or over
2002 $3,000 $3,500
2003 $3,000 $3,500
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008+ $5,000 $6,000

These changes can certainly have an important impact on your savings plans. Remember, though, that the new tax law has not changed other limits on IRAs. For example, income limits have not changed. You must have earned income in order to contribute to an IRA. If your earned income is less than the contribution limit, you can only contribute up to the level of your earned income.

Also, depending on your tax filing status and Adjusted Gross Income (AGI), the amount you are able to contribute and deduct is reduced, or eliminated. Currently, for single taxpayers, the eligibility for the full amount shown above diminishes starting at $95,000 AGI, and is completely eliminated at $110,000 AGI. Married people who file jointly can contribute the full amount shown if they have an AGI of less that $150,000, but their eligibility to contribute is reduced, then eliminated at $160,000 AGI.

http://www.ssa.gov/women
The Social Security Administration offers this site to help women plan for and navigate their retirement years. It provides a number of fact sheets and links regarding social security, retirement planning, disability, and supplemental income programs. The site can also help guide you to information that is relevant to your needs. For instance, you can choose a "life stage" category, such as working woman, bride, new mother, caregiver, divorced spouse, or widow. Also, you can fill in a short screening survey to identify programs and services for which you may be eligible.

http://www.collegesavings.org
This site is a clearinghouse for information on state-sponsored college savings plans, along with links to other sources and articles on planning for education expenses. State plans are essentially prepaid tuition, based on current rates; your payments are invested now and used to pay the higher tuition rates when your son or daughter later attends a participating public or private institution.


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