Retirement Planning & IRAs

Choosing the Right IRA

Choosing the right IRA is dependent on several factors:

• your household income
• your current tax rate
• the length of time you plan to hold your investments
• your estimation of your future investment returns
• your estimated tax rate when you withdraw funds
• future tax law revisions

Because every person's situation is different, there isn't one simple answer. You need to compare your choices and decide which is best for you. Your Brown Insurance Group advisor can assist you in reviewing your financial situation.

Types of IRAs

Roth IRA vs. Traditional IRA

The main difference between a Roth IRA and a Traditional IRA is when you pay taxes. Contributions to a Roth IRA are made from after-tax income. Roth IRA contributions grow tax-free and are not taxed when withdrawn for qualified reasons. These include a first-time home purchase, disability and medical expenses, and any withdrawal taken after age 59-1/2, as long as the account has been open for at least five years. Withdrawals that do not qualify may incur taxes and/or penalties. You may also want to consult a tax professional.

Contributions to a Traditional IRA are tax-deductible (subject to certain income limits) and taxes are paid when you withdraw the money. Contributions grow tax-deferred.

Simple IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax qualified retirement plan for businesses with fewer than 100 employees. It enables eligible firms to offer 401k-type benefits without complicated rules or high administrative expenses. It enables eligible employees to make tax-deductible contributions beyond what a Traditional or Roth IRA allows.

For Businesses, SIMPLE means:

• No top-heavy rules
• No discrimination testing
• No form 5500 filings each year
• Fully deductible contributions (subject to certain limits)

For Individuals, SIMPLE means:

• Contribution limits far above what a Traditional or Roth IRA allows
• Complete investment control
• Some level of employer contributions
• Full and immediate vesting of employer contributions

Required employer contributions can be made on either a 3% of compensation ‘elective’ basis or a 2% of compensation ‘non-elective’ basis. SIMPLE contribution limits for individuals are as follows:

SEP IRA

A Simplified Employee Pension (SEP) IRA is an easy to set up and easy to administer retirement plan. There are generous funding limits and contributions are fully tax deductible.

Because of the plan’s simplicity affordability and flexibility (contributions can be stopped or started at any time) the SEP is great for small businesses, professionals and self-employed people. Certain rules include:

• Employees cannot contribute personally – only employer contributions are permitted
• SEP plans cannot discriminate – employees must receive equal percentage contributions
• A SEP plan must cover anyone:
  • Who is 21 years old;
  • Who has worked for the employer for 3 of the past 5 years;
  • Who has earned at least $500 for the year.
• Contributions in 2007 may not exceed 25% of compensation or $45,000, whichever is less. Self-employed individuals may not contribute more than 20% of compensation or $45,000, whichever is less.