Masonry Magazine January 1976 Page. 42
INDIVIDUAL
RETIREMENT ACCOUNT
Most of you read in the May, 1975 issue of "Masonry" that MCAA has selected the nationwide facilities of Modern America Corporation, an affiliate of CNA/insurance, to provide members with expert pension and profit-sharing plan consultation. This is particularly meaningful since tax law changes brought about by the Employee Retirement Income Security Act of 1974 (ERISA).
What are some of the changes brought about by ERISA? Well, in the past, corporations that established retirement plans were given better tax incentives than were non-incorporated, self-employed individuals. This new legislation has substantially improved the features of qualified plans for self-employed individuals.
Previously a self-employed plan, also known as a Keogh Plan (or an HR-10 Plan), had a maximum contribution of $2,500 per year or 10% of income, whichever was less. This has been raised to $7,500 per year, or 15% of income, whichever is less.
Also, a new feature of HR-10 is that if a self-employed person makes under $5,000 a year, he can still put in up to $750 per year which would exceed 15%, as long as he makes $750 per year.
This represents an interesting point. A worker's wife doing some modest self-employed endeavor could earn some $750 per year for her work and put it all into an HR-10 Plan, thus sheltering it completely from current income tax for the ultimate retirement benefit of both her husband and herself.
Previously with Keogh Plans lump sum distributions, after age 59, were taxable as ordinary income, now they're treated the same as lump sums from corporate pension plans; that is, a portion of the distribution will be entitled to the more advantageous capital gains treatment.
The Individual Retirement Account (IRA) is probably the most important single element of the new Pension Reform law. The individual retirement account is an extremely innovative feature to the new law. It is intended to extend availability of tax-shelter retirement accounts to 50% of the work force in America not previously covered.
What IRA says is this: Any individual with earned income, employee or self-employed, who is not an active participant in any other qualified plan, can establish an Individual Retirement Account. By doing so, he can put in up to $1,500 or 15% of his income, whichever is less, and shelter it from his current income tax. As with all other qualified plans, accumulations on these contributions carry a tax shelter in the years when they occur. Moneys can't be taken out of the plans without penalties before age 59½ and must begin to be withdrawn before age 70½. The basic structure of IRA's, how and what they can be funded by, their flexibility as to starting and stopping them from what we've seen of the new legislation, so far is basically very simple. Undoubtedly, a good deal of the working force in America that hasn't been covered by any type of Pension benefits in the past will be taking advantage of Individual Retirement Accounts beginning in 1975 and continuing into the future.
What's so good about having a Retirement Plan anyway? Well, the first answer to that question has got to be the tax advantages in establishing a plan.
Let's take an example: a person age 40 in a 50% tax bracket who takes out a Keogh Plan and puts in his maximum contribution $7,500 a year.
* First of all, he will save $3,750 a year in taxes, every year.
* Tweny-five years later, he would have saved $93,750 in taxes on the contributions alone.
* Second, the accumulation of the investments, whatever they're invested in, accumulate with an income tax shelter. In other words, rather than get a 1099 every year from the bank or savings and loan, where you may be saving your money on a non-tax sheltered basis, all accumulations under Keogh occur tax-free in the years they're occurring. Let's take a look at what this tax sheltered contribution and tax-free accumulation of compounded earnings means.
Take that same individual, age 40, putting in $7,500 a year in a Keogh Plan and compare him with a fellow in the same tax bracket, the same age, doing the same thing independently. Let's say they both invest in something that over the long-haul returns 6% per year, certainly a conservative return in today's market place.
The fellow doing all this on his own would have accumulated $141,950 at his age 65.
Do you know what a fellow using a Keogh Plan would have? He'd have $436.170! Over $290,000 more. Over 3 times more.
But let's not stop there. The independent saver's Annuity income at age 65, assuming that he had a wife the same age and takes a joint survivorship annuity that pays each of them as long as either one lives, would provide $886 per month or $10,632 per year. The Keogh Plan participant in the same situation would receive $2,722 per month or $32,764 a year.
You might ask, is there a catch? Well, the Keogh Annuity income is taxable, while the independent saver's is not, but that's not actually a catch because suppose for simplicity sake the Keogh participant has no other income, takes a standard deduction, and pays tax on the rest of the $32,000 plus a year he is getting. He'll pay only $6,929 taxes; he'll still receive $25,685 per year. Compare this to the independent saver's non-taxable income of $10,632 per year. That's over $15,000 a year more. Or about 2½ times more retirement income.
And lastly, suppose both these fellows live a normal life expectancy at their age 12 years, and their wives live 7 years after them which is the norm. After paying all the taxes, the couple with Keogh would receive in total $550,825, while the couple that saved independently would have only received $232,469. In other words, the couple that saved for retirement in the Keogh Plan, after paying all their taxes, would be $318,356 ahead.
Now this is a hypothetical example, and of course individual situations will vary, but the principle is the same.
However, this principle is applicable not only to Keogh masonry • January, 1976