There is a wide variety of tax-advantaged ways for individuals to save for retirement. Because of their income tax benefits and because IRAs are so easily established, they have become one of the most often used retirement savings vehicles available today. Recent tax laws, however, have created three very unique types of IRAs – the Traditional IRA, the Non-Deductible IRA and the newer Roth IRA.
Social Security was originally introduced in 1935 in the aftermath of the Great Depression. It was intended to provide a safety net of income to retired and disabled workers and their families. Social Security is a mandatory plan, requiring most wage earners to contribute a percentage of their yearly income to support the program. In return, they, their spouses and sometimes their dependents are eligible for retirement, disability and survivorship benefits.
Today, over 95% of the people over 65 receive a Social Security benefit check. For many this monthly benefit represents their main source of retirement income.
Every year you work, you and your employer contribute equal amounts to Social Security, as required by the Federal Insurance Contribution Act (FICA). In 2003, 6.2% of your earned income is withheld from your paycheck to fund Social Security. Another 1.45% went to Medicare for a total deduction of 7.65%. Your employer matched your contributions with an additional 7.65% of your earnings going into the programs mentioned.
You may be pleased to know that there is an earnings level at which Social Security payments are no longer required. No Social Security withholdings are required on any earned income over $87,000; the amount contributed to Medicare has no earnings cap, however.
If you were born before 1938 you may collect full Social Security benefits when you turn 65, or you may collect 80% of your benefit if you retire at 62. For people born after 1938, Normal Retirement Age (NRA), or the age at which you can receive full social security benefits, gradually increases upward from age 65 to age 67. Visit http://www.ssa.gov to determine your NRA. When you die, your surviving spouse is entitled to your benefits, unless he or she would collect more based on their own earnings history.
Once you begin receiving retirement benefits, you may have to include them in your taxable income reported to the IRS each year.
If your total income for the year, including half of your Social Security and your tax-exempt earnings, is greater than $32,000 ($25,000 for single taxpayers) you will owe federal income tax on part of your Social Security benefits. The IRS provides you with a worksheet to figure out how much you must include in your taxable income each year.
When you get a Social Security card, your Social Security benefit account is open. It is not activated until you begin earning income. Once your earnings begin, the amount you contribute each year is recorded.
The accuracy of this record is important. You can get a copy of your earnings record from the Social Security Administration (SSA). Fill out Form 7004 and mail it to SSA. The forms are available at your local Social Security office or by calling 800-772-1213. If you discover your record is wrong, you can ask that it be corrected, though you must supply evidence of errors. The SSA encourages people to check their earnings records every three years or so, since the earlier a problem is found, the easier it is to prove and correct.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.