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Your Father's Pension
The
concept of retirement is fairly young. It was only during the past century that
most people could expect to stop working sometime during their 50s or 60s and
live out their days on a pension earned over the course of their careers.
However,
participation in traditional pension plans — technically known as defined
benefit plans — has fallen to just 38 percent of U.S. households,
compared with 59 percent in 1992. At the same time, participation in defined
contribution plans, such as 401(k)s and 403(b)s, has grown to 79 percent of
households, up from 58 percent in 1992.¹
Defined
contribution plans place different responsibilities on account holders than do
pension plans. Here's what you should know to help reduce your exposure to
unnecessary risks when accumulating and distributing assets.
Allocation
As you get closer to retirement, you may want to begin shifting your retirement
funds to more conservative investments. It's important to protect retirement
assets from too much risk when there is not enough time to recover from market
fluctuations and losses.
Accumulation
In 2004, federal law allows pre-tax contributions of up to
$13,000 to a 401(k) or a similar employer-sponsored retirement plan ($16,000 for
those aged 50 and older).² Typically, there is no minimum contribution, but
even if the plan allows you to contribute more than the federal maximum, you
won't be allowed to deduct the extra amount from your taxable income.
Distribution
Withdrawals prior to age 59½ generally result in a 10 percent
federal income tax penalty in addition to ordinary income taxes. The exceptions
to this rule are complex.
But
don't wait too long to begin taking money out. Withdrawals generally must begin
by age 70½ and meet the minimum set by the IRS based on your age and your
beneficiary designation.³ The tax penalty for failing to withdraw enough is
half of the required withdrawal.
It's
critical to be aware of the unique responsibilities of defined contribution
plans. Call today to learn more about the rules affecting your specific
situation.
1)
Employee Benefit Research Institute, 2004
2) Distributions from employer-sponsored retirement plans are taxed as ordinary
income.
3) Exceptions may apply.
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