RETIREMENT STRATEGIES. Your IRA Planning for Tomorrow Today

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1 RETIREMENT STRATEGIES Your IRA Planning for Tomorrow Today

2 Achieving a comfortable future requires more from you more planning and more resources than in the past. Investment Products: ARE NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY MAY LOSE VALUE ARE NOT A DEPOSIT OF OR GUARANTEED BY ANY BANK OR ANY BANK AFFILIATE

3 Planning for a secure retirement Consider that Social Security payments make up only about 39% of retirees income 1 or even less if you earn a high income today. The balance must come from pensions and personal savings. That s why individual retirement accounts (IRAs) have become a fundamental part of personal savings. Reports show that Americans now have over $2.3 trillion invested in IRAs. 2 And thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, investors can begin contributing even more to their tax-advantaged retirement accounts, helping to improve their chances for a secure future. IRAs are more versatile and investor-friendly than ever before. Let s see how they can help bring your retirement plans into focus. 1 Social Security Administration, June Cerulli Associates, Inc., October 2003.

4 Tax-deferred compounding IRAs may be a lot more powerful and versatile than you think. They can really enhance your long-term investments by combining two key concepts: TAX DEFERRAL. You ll pay no federal income tax on your IRA earnings as they accumulate. Taxes are deferred until you begin receiving distributions 3 when you may be in a lower tax bracket than you are in now. And if you qualify for a Roth IRA, your distributions can be completely tax free. COMPOUNDING. Any earnings on your IRA investments can generate additional earnings, which in turn can generate more earnings. That s known as compounding, and it can help boost your retirement savings. Of course, your earnings will be based on investment results. 3 Withdrawals taken before age may be subject to a 10% federal income tax penalty.

5 New contribution limits Your IRA has the potential to grow considerably larger using the higher contribution limits established by the tax law changes of Now you can contribute up to $4,000 per year from 2005 through 2007 and $5,000 per year beginning in Compare the growth of two hypothetical IRAs earning an 8% average annual return over a 25-year period. One is funded with annual contributions of $2,000 (the maximum permitted under prior tax laws) and the other is funded with the new maximums noted above. As you can see, the higher limits can make a substantial difference in the growth of your IRA. Comparison of $2,000 annual contribution vs. maximum annual contribution $400,000 $300,000 $242,700 $200,000 $100,000 $157,909 0 Year Assuming a reverted federal tax rate of 39.6%, lump-sum withdrawals of $242,700 and $157,909 would have been worth $146,591 and $95,377 respectively after taxes. The chart is hypothetical, is not intended to represent the performance of any specific product, and assumes that contribution amounts and tax rates after 2010 revert to 2001 rates. 4 Economic Growth and Tax Relief Reconciliation Act of Current law calls for the IRA contribution limit to revert to $2,000 in 2011.

6 Advantages of an IRA IRAs offer much more flexibility than other types of retirement vehicles, such as employer pension plans or 401(k) plans. ACCESS TO YOUR FUNDS. IRAs have always permitted withdrawals without a tax penalty after age But now you can access your money earlier without a penalty if the funds are used for any of these special circumstances: Qualified expenses related to higher education Purchase of a first home (up to $10,000 lifetime limit) Payment of some health insurance premiums if you are unemployed Qualified deductible medical expenses Substantially equal periodic payments made over your lifetime Your disability or death (as defined under federal tax law) CATCH-UP PROVISIONS. Individuals age 50 and older have additional opportunities to save for retirement. The tax law changes of 2001 permit catch-up IRA contributions of up to $500 for 2005 and up to $1,000 for 2006 (income limits apply for deductibility as with regular contributions). EXPANDED INVESTMENT OPTIONS. A broad spectrum of options makes it easier to select investments that match your personal goals and risk tolerance. Your licensed financial professional will guide you in developing a suitable strategy and sorting through all the investment choices available.

7 LONGER CONTRIBUTION PERIOD. You can make a current year contribution to an IRA until April 15 the tax deadline of the following year, but don t unnecessarily delay making your contribution. By contributing earlier in the tax year, you ll reap more benefits from tax deferral and compounding. ESTATE PLANNING. With proper planning, your beneficiary can choose to receive distributions over his or her life expectancy, allowing tax deferral and compounding of earnings to continue over more than one lifetime. This powerful estate-planning strategy is designed for investors who will not need the money from the account to fund their retirement. TRADITIONAL OR ROTH? Depending on your income and tax strategy, you can choose between a traditional IRA and a Roth IRA. Both offer tax-deferred growth and the other advantages of IRAs, but a Roth IRA also has the potential for tax-free withdrawal of compounded earnings as long as the IRA has been open at least five tax years and you are at least age This powerful estate-planning strategy is designed for investors who will not need the money from the account to fund their retirement. Your financial professional can help you decide which IRA is right for you.

8 Contributions and withdrawals Traditional IRA Who is eligible? Anyone under age with earned income. 6 Nonworking spouses are also eligible. How much can I contribute? Single Filers $4,000 $5,000 Joint Filers 7 $8,000 $10,000 Contribution may not exceed the amount of earned income. Each individual who is age 50 or older may make an additional $500 catch-up contribution for In 2006 this increases to $1,000. What contributions are tax deductible? If you are not covered by a pension plan, contributions are fully deductible. If you are covered by a pension plan, you may deduct contributions subject to these income limits: Single Filers Fully Deductible Partially Deductible Not Deductible 2005 and After < $50,000 $50,000 to $60,000 > $60,000 Joint Filers Fully Deductible Partially Deductible Not Deductible 2005 < $70,000 $70,000 to $80,000 > $80, < $75,000 $75,000 to $85,000 > $85, and After < $80,000 $80,000 to $100,000 > $100,000 How are withdrawals taxed? Deductible contributions and earnings Taxed as ordinary income when withdrawn; a 10% federal income tax penalty may apply if withdrawn before age , unless a special circumstance applies (see page 4). Nondeductible contributions Not taxed, but withdrawals are considered part contribution and part taxable earnings. What about required distributions? Required minimum distribution must begin by age Income refers to adjusted gross income (AGI) on federal income tax form. 7 Maximum contribution is one-half of this amount for each spouse s account.

9 Roth IRA Anyone with earned income 6 subject to these income limits. Nonworking spouses are also eligible. Full Partial Contribution Contribution Ineligible Single Filers < $95,000 $95,000 to $110,000 > $110,000 Joint Filers 7 < $150,000 $150,000 to $160,000 > $160,000 Same as traditional IRA. Key Point: If you contribute to a traditional IRA and a Roth IRA, your combined contributions cannot exceed the $4,000/$8,000 limits. Contributions are not tax deductible. Key Point: Even if your contribution is not fully deductible, an IRA is still a good retirement-planning tool because of tax-deferred compounding and other advantages. Other types of savings plans may not offer all these benefits. Contributions Not taxed upon withdrawal. Contributions are considered returned first, then earnings. Earnings Not taxed if withdrawal is made after IRA is open for five tax years or longer, and withdrawal meets one of the following conditions: (1) made after age ; (2) made to beneficiary; (3) attributable to disability (as defined under federal law); or (4) is a qualified first-time home buyer distribution. None required during your lifetime useful for estate planning.

10 Other things to consider IRAs are versatile planning tools. Consider these benefits: IRAs can play a key role in estate planning. Your financial professional can provide information on selecting beneficiaries in accordance with your estate plan. If you already have a traditional IRA and your AGI is less than $100,000, you may be able to convert it to a Roth IRA. Although the converted amount might be taxable at the time of conversion, you will still capture the benefit of tax-free distributions in the future. When changing jobs or retiring, rolling over your retirement plan assets 8 into an IRA may provide important advantages: Expanded investment choices Flexibility in naming beneficiaries and taking distributions Guidance from a financial professional Consider consolidating a number of retirement accounts into a single plan. This will make it easier to monitor your account performance, ensure proper asset allocation, and simplify your record keeping. 8 If your retirement plan assets include company stock, you may not want to roll over this portion. You should discuss the tax rules related to net unrealized appreciation with your tax or legal professional before making your decision.

11 Focus on tomorrow today Opening your retirement account is the all-important first step if you haven t already done so. We recommend that you develop a retirement strategy with the help of a financial professional who knows you and understands your goals and reasons for investing and the amount of risk you re comfortable assuming. He or she can help you take several important steps that may lead to a financially secure retirement: Convert or consolidate other qualified assets. Select an IRA and suitable investments. Integrate an IRA into your estate plan. Answer questions you may have about your long-term plan. Why not put the power of an IRA to work in your retirement plan? Join the millions of investors who are building their future this way. Call your financial professional today.

12 Financial professionals are not tax or legal advisers. Please consult your tax or legal adviser regarding your particular situation. Securities products and services are distributed by Prudential Investment Management Services LLC, a Prudential Financial company. Strategic Partners is a service mark of The Prudential Insurance Company of America. IFS-A P2417 Ed. 10/01/2005 STRATEGIC PARTNERS SM