When You Absolutely Can’t Afford to Lose Your Retirement Fund…

(Clinton, NJ, March 17, 2010) - The name, “Bernie Madoff,” still evokes extreme feelings of anger and disbelief that are almost palpable. Madoff is the former stockbroker, investment advisor and mastermind behind the $50 billion Ponzi scheme that left thousands of investors reeling from the loss of their entire life savings and substantial retirement accounts. Many are left wondering how Madoff “pulled off” a fraud scheme of this magnitude for as long as he did. Many were left in complete financial ruins.

In the wake of this, you may be wondering what you can do when you absolutely can’t afford to lose your retirement account, especially when there are so many different investment options to choose from? For many people, yearly investments in an Individual Retirement Account (IRA) have become automatic. But what kind of IRA – traditional, Roth or SEP? Do you invest through a bank, broker or investment firm? What about your company’s 401K plan?

Faced with all these choices, it’s imperative that you know the pros, cons, ins and outs of each one so that you can make the best decision for you, your money and your retirement. It’s also beneficial to consult with your tax advisor to discuss the specific tax advantages/disadvantages of each option in light of your specific circumstances.

Here are some basics to consider when it comes to the various types of individual retirement savings plans.

Bank or Broker?

People often ask, “Why would I open an IRA account in a bank when I can get a much larger return on my investment dollars through a brokerage firm?” If you can afford to lose your investment, perhaps even all of it, then it really doesn’t matter where you choose to invest. If you can’t, then here are the advantages of a bank-held IRA:

• Federal Deposit Insurance Corporation Protection (FDIC) – Bank-held IRA accounts are FDIC insured and protected up to $250,000, separate from any other accounts held in the same bank.
• Guaranteed Interest Rate – Interest rates on bank-held IRAs remain constant for the entire length of the investment term (3 months – 10 years), and your principal is protected and guaranteed. When you use an investment advisor or broker, your money is usually invested in accounts with fluctuating rates of return. Some of these are high-risk accounts, with possible loss of principal; others carry lower risk and are considered more stable. However, most investors with these types of accounts took a major hit with the current recession; many lost more than half their account value.
• No Maintenance Fees – Banks typically do not charge maintenance fees for IRA account plan administration.
• Personalized Service – When you deal with your local community bank, you get the benefit of individualized service and support. You’re not just an account number – you’re a familiar face and they know your name.

What Type of IRA – Traditional, Roth or SEP?

There are several types of IRAs to choose from, and your selection has a lot to do with your present and anticipated future income and the types of tax advantages you need, both now and in the future. An accountant who understands your complete financial picture is the best resource to offer advice on the type that’s right for you.
• Traditional IRA – With a traditional IRA, you can contribute up to $5,000 yearly ($6,000 after age 50). The amount of your contribution is a dollar-for-dollar deduction from your gross income, which decreases your tax burden for the year in which the contribution was made. If you’re married, both spouses can take advantage of the full allowable contribution. In return for this yearly tax offset, withdrawals from a traditional IRA account are taxed in the year in which the monies are withdrawn, which can begin anytime after age 59 ½. The advantage here is that most people are in a lower tax bracket (and therefore are taxed at a lower rate) when they reach retirement age.

• Roth IRA – With a Roth IRA, you don’t receive any tax breaks for the year in which the contribution is made. The contribution is taxed at the time it is made; when you withdraw money from this account, after the age of 59 ½, you don’t pay any tax or interest penalty on the money, as long as it has been held in an account for a minimum of five years.

You can make yearly contributions to both a traditional and Roth IRA, however, your contributions to both may not exceed the $5,000 or $6,000 limits. For example, if you are 45, you can put $2,500 in a traditional IRA and $2,500 in a Roth IRA.

• SEP Plan – If you’re a sole proprietor or a small business owner, a Simplified Employee Pension (SEP) plan may provide you with the best vehicle to save for retirement. With a SEP IRA, you can contribute up to $49,000 or 25% of your income, whichever is less. For many sole proprietors, this is an excellent way to save for retirement, with tax advantages that are similar to a traditional IRA.

Keep in mind that anyone with earned income can contribute to an IRA. As long as you have a job that reports earned income, you are eligible to contribute to an IRA, no matter how old you are (i.e., a 16-year-old with earned income can contribute to an IRA).

There are certain circumstances when you can withdraw from your IRA prior to age 59 ½ without penalties. These include situations when the money will be used for hardship cases, education or medical expenses; you will pay taxes on the interest only, with no IRS penalties.

What About a 401K Plan?
Many employers offer 401K plans to their employees both as a benefit and as a means to save for retirement. These plans are usually diversified among a number of high- and low-risk stock options. However, while they can yield a high rate of return and maximize investment savings, they are not FDIC insured or guaranteed. In other words, you could potentially lose a substantial amount of savings in a bad financial market.

The Bottom Line…
Your accountant is best suited to advise you on the retirement savings options that provide the best benefit for your individual circumstances. For example, it might be in your best interest to contribute to a traditional IRA, a Roth IRA and a 401K program through your employer.

Just remember that the only way to guarantee your rate of return and to safeguard your entire investment is through an FDIC-insured bank-issued IRA. Anything other than that may deliver a high rate of return or you can suffer crushing losses. Only you can decide what you’re willing to risk, After all – it’s your money.

Unity Bank has branches in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. The bank began as First Community Bank in 1991 with two branches and thirty employees. It now has over one hundred and sixty employees.
For more information about Unity Bank, call Rosemary Fellner at 800.618.BANK (2265), or visit www.unitybank.com.
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Ilena Sorge

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Delia Associates

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