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         New Tax Laws Changes

         The Truth On Retirement Living Expenses

         Retirement Savings

         For more information on IRAs, mutual funds and distributions click here.


In 1935, after bank failures and the stock market crash of 1929 had destroyed the savings of millions, Americans turned to their government to guarantee the nation's workers would not face retirement in poverty. The solution was Social Security.

Today, with the Baby Boom generation approaching retirement age, Social Security faces a dilemma. By about 2012, the Social Security system will be paying out more in retirement benefits than it takes in from worker's payroll taxes.

Even if the Social Security system continues to operate at the present level, benefit payments may provide only about 18% of retirement income. At the same time, many people believe you will need between 70% to 80% of your current annual income to maintain your lifestyle when you retire.

Here are a number of tax-advantaged ways to improve your retirement situation.

For the Individual

Traditional IRA - One of the best ways to save for your retirement is with an IRA (Individual Retirement Account). An IRA offers the ability to put away up to $2,000 of compensation annually. With a traditional IRA, your earnings grow tax deferred so your assets have the potential to grow faster. Full or partial tax deductions are still available for many people.

Roth IRAs are funded with after-tax dollars. As with the traditional IRA, you may contribute up to $2,000 a year. You may contribute $2,000 total to a traditional IRA, Roth IRA or both. To be eligible to contribute the full $2,000, you must be a single tax filer with an adjusted gross income below $95,000 or a married couple who files a joint tax return and has a joint income of less than $150,000. Earnings are not taxed as they accrue and distributions are tax-free, as long as you have had the account for at least five years and meet restrictions governing withdrawal.

Annuities - A tax-deferred annuity - fixed or variable - is a contractual agreement between an investor and an insurance company. The investor makes a deposit of funds and earnings have the potential to grow within the contract on a tax-deferred basis. Remember, variable annuities are sold by prospectus which contain more information about changes and expenses. Be sure you read the prospectus and's annuity section before you invest.

For the Workplace

401(k)s are a type of retirement plan named for a section of the tax law that allows employees to contribute a portion of their pay, in pre-tax dollars, to a company-sponsored retirement plan. In a 401(k) plan, the participant chooses to contribute to the plan and the employer may or may not make matching contributions. A similar type of plan, the 403(b), is available through non-profit organizations.

Simplified Employee Pension or SEP IRAs provide business owners with an easy flexible alternative to traditional pension plans. Only the business owner contributes and contributions can be made up to fifteen percent of the employee's salary or $24,000, whichever is less. These contributions are tax deductible to the business.

SIMPLE IRAs resemble traditional 401(k)s. They are available only to businesses with fewer than 100 employees. The SIMPLE allows employees to defer up to $6,000 of their pay pre-tax into a retirement account. Employers must also contribute but they have a choice as to how they do so. One way for an employer is to match the contributions of only those employees who contribute up to three percent of pay (which may be reduced to 1% in two out of every five years). There would be no match for non-contributing employees. The alternative to this is for an employer to contribute for all employees, whether or not the employees contribute. Under this alternative, the employer contributes 2%.

Qualified profit-sharing plans offer business owners more control over how much they contribute. Business owners make contributions and can change them annually. The maximum contribution is fifteen percent of eligible payroll with an individual limit of $24,000 per employee. A variety of contribution formulas are available to customize qualified profit-sharing plans, as with all plans seek a tax specialist in determining the best plan for your specific situation.

Money purchase pension plans are often paired with profit sharing plans. They are funded by mandatory employer contributions only, based on a fixed percentage of the employees' pay (up to 25% annually), within IRS limits.

Defined benefit pensions are funded by mandatory employer contributions which are calculated actuarially, based on the desired annual retirement income. Because contributions can be significantly higher than limits in other types of plans, these plans are popular with business owners who are nearing retirement.

How to allocate your retirement savings:

  • First, put the maximum amount allowable into any account in which your deposits will be matched. If your employer matches your contribution dollar for dollar, your investment has already earned a 100% return!
  • If eligible, the next $2,000 should be put into a Roth IRA.
  • Next, if you are not eligible for a Roth IRA, contribute the maximum to your traditional IRA.
  • Finally, consider using any additional funds for a tax-deferred annuity.

If there is one hard and fast rule about saving for a comfortable retirement, it's this: start early. And if you haven't started early, start now. If you are an employee, many retirement plans have hidden or internal charges and it is critical to have an independent analysis of your total cost before you establish a plan, and even with existing plans.



We have stated in past articles in that many of the financial models used to estimate retirement income needs actually overstate how much capital a retiree is likely to need. There are several reasons for this miscalculation including:

  • Upon retirement asset allocation should change to a more conservative/income stance, but since all the monies are not needed right away some assets may still be allocated for growth.
  • Many retirees are still able to continue to add savings - especially in the early years of retirement.
  • Inflation adjustments have typically been too high of late. Many models typically estimate 4% annual inflation, which is substantially higher than recent experience.
  • Taxes have generaly held steady or acutally fallen in recent years, and efforts to balance both state and federal budgets suggest that future tax increases are not likely.
  • Retiree's spending patterns change significantly as they age.

Our first and last factors listed above may be where the majority of planning errors occur. Obviously, if some growth oriented investments can be maintained at retirement the potential for increased investable assets over the long term are enhanced. If you combine this with the fact that spending patterns lessen with age most people's retirement outlook may be better than many planner's illustrate. A study reported in the Journal of Financial Planning compared the actual spending by retirees age 65-74 with those 75 and over. Even though health care costs increased, all other catagories (see below) of costs fell. In fact, overall speding by the older group fell in average 15-20%. These two factors are critical in accessing your actual retirement living expenses as well as investable assets.




  • IRA's which have been limited to a $2,000 maximum annual contribution per individual since inception, will now permit larger contributions incresing from $3,000 in 2002 to $4,000 in 2005 and $5,000 in 2008. Additionally, there is now a provision to index the contribution limits to the annual Cost of Living Adjustments allowing for further increases post-2008 in $500 increments. These changes apply to both Traditional and Roth IRA's.
  • The maximum amount that a 401(k), 403(b) or Salary Reduction SEP plan participant can defer out of salary to the plan (currently $10,500 for 2001) will also increase in $1,000 increments until 2006 at $15,500, at which point the increases will be based on Cost of Living Adjustments.
  • The Education IRA annual contribution limit increases from $500 to $2,000.
  • The amount of eligible compensation taken into account for determining contributions to Tax Qualified Retirment Plans and SEP IRA's has been increased from $170,000 to $200,000. This will affect Profit Sharing, 401(k), and Money Purchase Pension plan participants, among others.
  • SIMPLE IRA and SIMPLE 401(k) participants will be able to increase elective deferrals (currently capped at $6,500) in $500 increments until 2005 at $10,000.
  • Individuals over the age of 50 will permitted to make catch-up contributions to IRA's, 401(k), 403(b), 457 and SIMPLE plans.

Provision Current Law New Law
IRA Contribution Limits Current IRA contribution limit is $2,000.
2008 and beyond
$5,000, indexed in $500 increments
IRA Catch Up For Individuals over 50 No Provision
SIMPLE IRA Contribution Limits SIMPLE maximum elective deferral is $6,500 per year. SIMPLE elective deferral increased

2006 and beyond
$500 increment COLA increase
Education IRA Modifications
Current Education IRA contribution limit is $500.

Phase-out eligibility range for married taxpayers filing a joint tax return is $150,000 to $160,000 of Modified Adjusted Gross Income (MAGI). Thus, joint filers with over $160,000 MAGI cannot contribute to an Education IRA.
No Provision

Annual contribution limit increased to $2,000.

The phase-out range for married taxpayers filing a joint return has been invcreased to $190,000 to $220,000 of MAGI.
Corporations and other entities are permitted to make contributions to Education IRA's.

The foregoing information is for informational purposes only. It was prepared from sources believed to be reliable but is not guaranteed as to accuracy and is not a complete summary or statement of all available data. Please consult a professional advisor before implementing any of the strategies discussed above.