Individual Retirement Accounts: Why Bother?by William K.English 121Mr. FrostSeptember 22, 1996OutlineThesis: When planning for retirement, Individual Retirement Accounts offerseveral benefits; however, careful planning is essential to ensure that: uponretirement there is an adequate amount of money saved, that the heirs to the IRAare chosen carefully, and that unnecessary taxes and penalties are avoided.
I. Upon retirement there is an adequate amount of money saved. A. How much money necessary to retire?1.
Social Security verses retirement.2. Savings Accounts verses retirement.3. Advantages of starting an IRA early. II.
Careful selection of the heirs to the Individual Retirement Account. A. Advantage of leaving IRA to spouse1. Special rights as a spouse.
2. Different options the spouse has for claiming money. III. Avoiding unnecessary taxes and penalties.1.
Recoverable trust as beneficiary.2. Taking money out before the age of 59 1/2.3. Penalties for leaving money in too long.
Many people often live their lives without considering how they plan toretire. People do not realize that the idea of living solely on the benefits ofsocial security is not realistic. In order to secure a comfortable future,people must have some type of additional income. Sacrificing a small amount ofmoney into an IRA at a relatively early age could make a considerable differencein the lives of people upon retirement. When planning for retirement,Individual Retirement Accounts offer several benefits; however, carefulplanning is essential to ensure that: upon retirement there is an adequateamount of money saved, that the heirs to the IRA are chosen carefully, and thatunnecessary taxes and penalties are avoided.
It is important to consider how much money will be needed for a comfortableretirement. Careful planning is essential when considering an item with suchimportance. Phaneuf states that, according to figures used by most financialplanners, upon retirement the average person will need roughly seventy percentof their current income to continue living their present lifestyles (94). Withonly income from Social Security and money saved in bank accounts, most peopleare unable to achieve this goal. Furthermore, one must also consider, for aretirement account to be effective the account has to maintain interest ratesabove that of inflation. Inflation increases approximately four percentannually; and standard bank accounts barely beat this rate. In fact, at present,most savings accounts have an interest rate below four percent. Thus, regularsavings accounts are not a practical method to save for retirement; however,IRA’s offer deferred taxes on the interest earned until the money is withdrawnfrom the account.
Therefore for a given amount of money, there is aconsiderable advantage when saving in an IRA. For example, according to Heady:if you were to save $2000 dollars a year at 6% for 30 years under the terms of aregular savings account, the total earnings would be approximately $120,900after paying taxes; however, if you were to shelter $2000 a year at 6% in anIndividual Retirement Account that amount would increase by $48,000 dollars to atotal of $168,000 because of the tax-deferred feature (60).Using this example, the tax deferred feature of an IRA is easily recognizedas having a considerable edge over regular savings plans.
Another advantage to consider when planning an IRA is to start the accountas early in life as possible. It is obviously an advantage to use the programthat is going to give the best overall return; however, the advantage ofstarting early should not be taken lightly either. As with all savings plans, akey factor in the final results is the overall length of time that has beenexhausted investing into the account.
People often think that there is an agerequirement to start an IRA; however, this is not the case. There are severalBanks that will even allow teenagers under the age of eighteen to begin an IRA,as long as their parents cosign. The results of starting as a teenager areastonishing.
According to Spears: if a 15-year-old were to begin saving $2,000a year in an IRA for ten years and earns 10% a year, the compounded annualreturn on the Standard ; Poor’s 500-stock index for the past 60 years. Barringearly withdrawals, that $20,000 investment would be worth more that $1.5 millionat age 65 (55). It is easy to see that the earlier the account is started, themore interest