As you probably know, you’re eligible to start receiving Social Security retirement benefits once you reach age 62. But, if you take benefits at that age, you won’t get your full benefit amount.

Most people assume that they’ll get their maximum Social Security payment if they start receiving benefits when they reach “full retirement age”, which is between 65 and 67, depending on the year you were born. This is not true, though.

Actually, after you reach full retirement age, your benefits continue to increase at a rate of between 5% and 8% for each year that you delay taking benefits. How much, exactly, depends on which year you were born. This increase in benefits does not stop until you reach age 70.

So, if you’re healthy and you expect to have a longer-than-average life (and you can afford to do so), it may make sense for you to wait to take your Social Security retirement benefits until you reach age 70.

If you decide not to take your Social Security benefits when you reach full retirement age, you’ll still want to look into signing up for Medicare when you reach age 65. Medicare Part B has limited enrollment periods, and, depending on your situation, missing an enrollment period while you’re eligible may result in penalties.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

You may have heard of a relatively new type of retirement plan that offers the combined benefits of a traditional 401(k) and a Roth IRA. Originally, it was a temporary offering, but the federal government made it permanent a few years ago. It’s called the Roth 401(k), and here’s how it works:

Tax Deductibility: Contributions to a Roth 401(k) are not tax-deductible, so you make contributions with after-tax dollars. But, once you reach age 59 1/2, every distribution you take from your Roth 401(k) is completely tax-free.

Income Restrictions: There are no income restrictions for contributing to a Roth 401(k).

Contribution Limits: For the year 2010, the 401(k) contribution limit is $16,500. The “catch-up” contribution limit for those over age 50 is $22,000. This contribution limit is the total for all 401(k) plans, so if you have a traditional 401(k) to which you’ve contributed $8,000, you’re allowed to contribute $8,500 to your Roth 401(k) – assuming you’re age 50 or younger.

Employer Matching: Employers may offer matching funds, at their discretion. If matching funds are offered, they’re made with pre-tax dollars, and they’re held in a separate account.

Penalties: Because contributions are made with after-tax dollars, you’re allowed to withdraw your contributions at any time, penalty-free. But, in order to withdraw any gains, you must wait at least five years after opening your Roth 401(k) account plus you must be at least age 59 ½. Otherwise, you’ll pay a 10% penalty and income tax on the withdrawal of any gains.

Required Minimum Distributions: Once you reach age 70 ½, you’ll be required to withdraw a minimum amount from your account each year. How much you’re required to withdraw will be determined by the balance remaining in your account as well as your life expectancy, as determined by the IRS. If you fail to withdraw the required amount, you’ll have to pay a penalty.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

A 401(k) is a tax-deferred, qualified retirement plan that’s available through many employers. As a matter of fact, they’re only available through employers – unlike an IRA, you can’t go to the bank and set one up on your own.

401(k) plans are tax-deferred, meaning that your contributions to the plan are made with pre-tax dollars. So, if you make $50,000 per year, and you contribute $10,000 per year to your 401(k), you’re only taxed on $40,000 worth of income. Instead of being taxed in the year you make a contribution, your money is taxed in the year you withdraw it from your 401(k).

This is important, and here’s why: Ideally, you wait until you’re retired to withdraw money from your account. Most peoples’ post-retirement income is lower than their pre-retirement income, putting them in a lower tax-bracket after retirement. This means that most people pay lower taxes on their 401(k) withdrawals than they do on their regular, pre-retirement income.

In addition to the significant tax savings on retirement income, many 401(k) plans offer an added benefit: employer matching. With employer matching, your company puts money into your individual account, based on the amount you yourself contribute. For example, your employer might match 50% of your contributions, up to a certain dollar amount per year. This is equivalent to getting free money – or a raise – depending on how you look at it.

There are rules that govern how much you can contribute each year, as well as when you can – and can’t – take withdrawals from your account. Generally, you’ll pay a penalty plus income tax on withdrawals you take before age 59 ½, although there are some exceptions for emergency or hardship situations. And, once you reach age 70 ½, there’s a required minimum amount you’ll have to withdraw each year.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

If you have an IRA or a 401(k) and you’ve established a Revocable Living Trust, then you may want to make your trustee the beneficiary of your retirement account. Here’s how to do it:

• First and foremost, check with your attorney. Because of the tax consequences that may be involved, it’s crucial that you consult with your estate planning attorney before making your trust the beneficiary of any of your retirement accounts.
• Get the necessary forms from your plan custodian. Each administrator has its own beneficiary designation forms, and getting the right forms is as simple as logging on to the company’s website, or calling the customer service number.
• Fully and accurately complete the forms. Because each company’s forms are different, some forms are more complicated than others. When in doubt, check with your estate planning attorney. He or she has experience in this area, and can point you in the right direction. Make sure the forms are completely filled out with all the requested information, otherwise, your request to change your beneficiary could be rejected and you’ll have to complete a new form.
• Return the forms. You might be surprised how many people with the best of intentions complete all the forms yet somehow never quite get around to returning them to the custodian. Sending the completed forms back in is essential.
• Keep your confirmation with your trust agreement. You’ll get a written confirmation of the change in your beneficiary designation. Keep this written documentation with your trust agreement.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

When it comes to saving for retirement, there are several types of plans that offer income tax benefits. These plans fall into two categories: those that offer tax-deferred growth and those that offer tax-free growth. Here’s the difference:

Tax-Deferred

With a tax-deferred retirement plan, your contributions are not taxed in the year you make them. This is also known as making contributions with “pre-tax dollars”. So, if you earned $65,000 last year and contributed $15,000 to a tax-deferred retirement plan, you would only pay taxes on $50,000 in income.

Just as your contributions aren’t taxed, neither are the interest, dividends, or capital gains earned on the money in the account. With a tax-deferred retirement plan, you only pay income tax on the money in the account when you withdraw the money.

This is advantageous to people who anticipate being in a lower tax bracket after they’ve retired than they are during their working years, because they end up with a lower tax bill overall for the money in their retirement account.

Traditional 401(k)’s and IRA’s are examples of tax-deferred retirement plans.

Tax-Free

A tax-free retirement plan, like a Roth IRA, works in the opposite way. You contribute to the account with “after tax dollars”. However, as long as you follow the rules that come with having this type of account, your withdrawals are not taxed. This means that the interest, dividends, and capital gains earned on the account are never taxed.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

If you have a traditional IRA, 401(k) or other qualified plan, then starting April 1^st of the year after you reach age 70 ½, you’ll have to take at least a certain, federally-mandated, minimum withdrawal from your account each year. This is your Required Minimum Distribution, or RMD.

Your RMD will vary depending on the year. This is because it’s recalculated each year based on the balance in your retirement account, as well as the “distribution period”, which is the same as your life expectancy. To calculate your RMD, you’ll divide the balance of your account as of December 31 of the previous year by your life expectancy as determined by the IRS. Here’s an example:

Bob is an 89-year-old married man, whose wife is two years younger than him. His IRA balance as of December 31, 2009 was $120,000 and his IRS-defined life expectancy is 12 years. His RMD for the year 2010 would be $10,000, or one-twelfth of the balance of his IRA.

So, what happens if Bob does not take his Required Minimum Distribution for the year 2010? Then he’ll be subject to a stiff penalty – 50% of the amount he should have withdrawn or, in his case, $5,000.

What about taking only part of his RMD? Then he’ll still have to pay a 50% penalty, but only on the portion of the RMD he failed to withdraw. So, for example, if Bob took a distribution of $6,000, he’d pay a 50% penalty on the remaining $4,000 he should have withdrawn, making his penalty $2,000.

The bottom line? Make sure you know whether your account is subject to a required minimum distribution and, if it is, make sure you know how much your RMD is each year, so that you don’t miss a distribution and end up paying a hefty penalty.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

If you’re self-employed, retirement planning may take a little more effort than it does for traditional employees, but there are a number of options available to you. Here are two of the most popular:

• SEP IRA: A SEP IRA might be the simplest retirement account available to self-employed individuals and owner and spouse businesses. It’s easy to set up, and there’s not a lot of paperwork to keep up with.

With a SEP IRA, you’re allowed to contribute up to 25% of your W-2 income or up to 20% of your net self-employment income, up to a government-defined maximum limit. This maximum limit is quite high – this year, it’s $49,000.

There are some drawbacks to this type of retirement account. For instance, you’ll only want a SEP IRA if you don’t anticipate taking a loan against your IRA balance – there are no loans allowed. Plus, if you’re over age 50, there’s no additional catch-up amount; with other retirement plans, those over 50 can contribute extra each year in order to get ready for retirement.

• Individual 401(k): Establishing an Individual 401(k) is a little more complicated than setting up a SEP-IRA, and there’s more administrative work involved, but this type of retirement plan has its advantages.

For instance, although the cap on contributions is similar – for 2010 it’s $49,000 – contribution percentages are calculated differently for an Individual 401(k), meaning that you may be able to contribute a higher percentage of your income. Also, if you’re over age 50, you’re allowed to make additional “catch up” contributions. This year, people over age 50 can contribute up to an extra $5,500.

If there’s a chance you might need to borrow money against your retirement account, the Individual 401(k) may be a good fit for you. You’re allowed to borrow up to 50% of your account balance, with a total loan limit of $50,000.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

Traditional IRA: A traditional IRA, or Individual Retirement Account, is a tax-deferred retirement savings plan that you establish on your own, separate from any retirement plan that may be offered by your employer. For the year 2010, you’re allowed to contribute up to $5,000 to a traditional IRA; $6,000 if you’re age 50 or older (as long as you’ve earned at least this much income). Subject to certain income restrictions, these contributions to your IRA are tax deductible in the year you make them. Your money is allowed to grow, tax-free, until you withdraw it, at which point you pay taxes on the money. There are penalties for withdrawing money from an IRA before you reach age 59 1/2, unless you meet certain hardship requirements.

Roth IRA: Like a traditional IRA, a Roth IRA is a private retirement savings plan that is separate from any retirement plan offered by your employer. However, unlike a traditional IRA, a Roth IRA is a tax-free Individual Retirement Account. This means that you fund the account with after-tax dollars, but the money in the account grows tax-free and withdrawals from the account are not subject to income tax, provided the account has been open for at least five years and, with some exceptions, as long as you’re age 59 ½ or older when the withdrawals are made. There are restrictions on how much you can contribute each year, and there are penalties for certain types of early withdrawals.

Spousal IRA: A spousal IRA allows a non-wage-earning spouse to have an Individual Retirement Account based on his or her wage-earning spouse’s income. Because both Roth and traditional IRA’s require you to earn at least as much each year as you contribute to the account, a spousal IRA allows a stay-at-home spouse to contribute the full allowable amount to an IRA in any given year, as long as his or her wage earning spouse makes enough to cover the contribution. Once the stay-at-home spouse’s contribution is made to the IRA, that amount belongs to the stay-at-home spouse, no matter the source of the money.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

Are you saving enough for your retirement? Before you say yes, there are some things you should consider.

Unless you’re planning to down-size to a mortgage-free condo and never go outside, you’re probably going to need more to live on than you think. In fact, most people spend as much in their retirement as they did before they retired.

This means that in addition to all that travel you wanted to do, you’ll need to use your current cost of living as your estimated starting point.

You should begin saving for retirement as soon as you start working. A 10% savings is the norm, but if you haven’t been saving that much in the past, your percent going forward should probably be higher. Use income increases to save more. With each raise, bump up your savings percentage a few degrees.

Don’t forget about social security. Living off meager social security payments would be very difficult, but if you have other retirement accounts, this money can be mean a little extra to do the things you wish. And if you work longer before you start collecting, social security will pay you more.

Personal and work retirement accounts are great to have, but remember to factor in taxes as you estimate your retirement income. Unless you have an account that has already been taxed, you’ll have to pay taxes on the income when you withdraw funds. A Roth IRA or Roth 401K has already been taxed so your balance reflects the full amount that is available to you. This can make savings calculations easier.

The hardest retirement expense to calculate is medical care. No one knows what the future holds and it’s reasonable to assume that you may need additional medical care in the future and/or that your costs will rise over the years. Your best bet is to prepare for the worst case scenario. Even if you receive Medicare, you will still have to pay co-pays, premiums, deductibles and non-covered items. In your plan, you will also need to consider the possibility of assisted living expenses in the event you are unable to care for yourself.

And finally, remember that you’ll need your retirement to last for your entire lifetime. Since we don’t know when we’ll die, we need to assume that we’ll live the full life expectancy, which is currently between 90 and 100. Add up all of your expected retirement funds and divide by the number of years you will be retired before your potential passing. This is how much you will have to spend per year. If it is not enough, you need to save more.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

Millions of Americans in their late 60’s and early 70’s have a little-known option for boosting their retirement benefits. If you, like many people, started Social Security early, at age 62, you can go back when you’re older and re-apply for benefits at a higher monthly amount. The catch? You have to pay back all of the benefits you’ve received so far. The good news is that the federal government does not charge interest or penalties for doing this, so it can be an excellent deal for some people.

In general, Social Security benefits increase 8% each year until age 70, after which they’re capped. If you’re a high-wage earner , your annual benefit can nearly double if you wait until age 70 to start collecting, as opposed to retiring at age 62. Repaying and re-applying effectively restarts the clock, allowing you to collect benefits at the higher rate you’re entitled to based on your current age.

Whether or not repaying and re-applying is a good financial step for you depends on a number of factors, the first of which is your age. If you’re in your late 70’s, it probably won’t be an effective move, because you may not have enough years over which to recoup your lump sum repayment. Another consideration is your health and life expectancy. Again, if you don’t expect to live long enough to recover your lump sum payment, or if you need the lump sum to pay for health care expenses, then restarting Social Security is not a good choice.

These days, though, people are living well into their 80’s and 90’s. So, for people in their late 60’s to early 70’s who are in good health and who expect to live an average life span, paying back and restarting may be a wise decision. For help deciding whether this route is the right one for you, consult an elder law attorney.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.