The government requires that by April 1 following the year in which you turn 70.5, you are required to being taking minimum withdrawals from your IRAs, excluding the Roth IRA. The amount you are required to withdraw is based on a calculation (use this calculator) and that value is an annual number.

The example calculation is based on a $100,000 account balance and an 8% rate of return (based on a 27.5 year remaining life expectancy) and it requires that you take a minimum $3,649.64 withdrawal each year. The calculator is based on the published rules as of April 2002 and the calculator was last updated January 2006.

If you don’t take the required minimum withdrawals, then you are penalized 50% on the amount you were short by. So let’s say you were required to withdraw $5,000 and you only withdraw $1,000, then you actually owe a penalty of $2,000! So, be sure to take the minimum withdrawal or you’ll face a penalty but you can do whatever you want with it, including reinvesting it into the market (even into your Roth IRA if you meet the restrictions).

You’ve probably heard of the Roth IRA and the Traditional IRA, but did you know there are eleven varieties of IRAs? Yeah… there are a combined total of eleven types of IRAs and most of them are variations of the traditional or Roth IRA. For your reading pleasure, the eleven IRA types (and their descriptions) are:

1. First off, an Individual Retirement Account is a traditional or Roth that is set up with a financial institution like a bank, brokerage, or mutual fund. You can invest in stocks, bonds, MM, CDs, etc.
2. Next is the Individual Retirement Annuity which is a traditional or Roth that is set up with a life insurance company when you purchase an annuity.
3. An Employer and Employee Association Trust Account, common also known as a group IRA, is a traditional IRA that is setup by your employer, union or some other employee group.
4. A SEP-IRA, or Simplified Employee Pension IRA, is a traditional IRA that is set up by an employer for a company’s employees. The rules with a SEP are that the employer can contribute up to 25% of an employee’s compensation or $45,000, whichever is lower.
5. A SIMPLE IRA, or Savings Incentive Match Plan for Employees IRA, is another traditional IRA. How a SIMPLE works is that an employee can contribute up to $10,000 or 100% of their compensation, whichever is lower, and the employer will match up to 3%.
6. A Spousal IRA is a traditional or Roth that is funded by a person’s spouse if they earn less than $2,000 that year. The couple must file a joint tax return and the maximum is shared across both accounts.
7. A Rollover IRA, also called a Conduit IRA, is a traditional IRA that has been “rolled over” from a 401k, 403b, or some other similar account. There are no limits to the rollover.
8. An Inherited IRA is a traditional or a Roth acquired by a beneficiary, that isn’t a spouse, of a deceased IRA owner. There are some special rules with this and I recommend you read up on them if you’re in this situation.
9. An Education IRA (EIRA) is an IRA set up so that the funds will go towards the beneficiery’s education. The contributions are not tax deductible, so like a Roth, but all deposits and earnings are tax free if they are used for higher education.
10. Lastly there is the Traditional IRA…
11. And the Roth IRA.

There you go… eleven types of IRAs.

When you retire, should you roll over your 401k into an IRA? Yes. Should you roll over your 401k into an IRA Annuity? Ummmm probably not, says Walter Updegrave. An IRA Annuity is basically an annuity held inside an IRA and it’s probably going to be too expensive for what you’re getting out of it. An annuity is generally very expensive but the benefit is that money grows inside of it tax-free, but it’s not a strong selling point of an IRA annuity because money inside IRAs and 401ks is already growing tax-free - you don’t need an expensive fee generating annuity for that.

So, what’s the other draw of IRA annuities? There are living benefits known as GMIB and GMWB. GMIB stands for guaranteed minimum income benefit which is a guarantee of annual income if you hold the annuity for a pre-specified time period, usually 10 years, even if the market tanks. GMWB stands for guaranteed minimum withdrawal benefit that guarantees you’ll be able to withdraw a percentage (4-6% usually) of the original investment regardless of the market performance.

Ultimately the main knock against IRA Annuities is cost, the fees, and all the rules and restrictions regarding what you can do with an IRA. It’s probably a better idea to rollover your 401k into an IRA and stick it in a nice balanced mix of investments, an index fund, or a target retirement fund.

Wouldn’t it be cool to invest some of your retirement money on a movie production company? What about an apartment complex or some other non-traditional investment? Well, if you have a self-directed IRA, you’re allowed to as long as you follow some basic rules.

The basic rule is that you can’t benefit from the investment today because that would circumvent the rules governing retirement accounts. This means that you can’t invest in your own company or a company in which you own a majority interest or draw a salary that you can control. You can’t invest in things that you or your family will use, like a home or jewelry, and you can’t invest in artwork. There are more but those are some of the common ones and basically it’s to prevent you from taking money out of a retirement account and using it for the benefit now; if you do break the rule, then it’s all considered a disbursement and you pay taxes and penalties on it. Ouch!

So, what can you invest in? There are forty asset categories ranging from cattle to film companies, from restaurants to railroads, and from cemeteries to startups.

How do you start a self-directed IRA? You can do so by going to your brokerage or your bank and setting up a trust of some kind. They keep the records, for a fee, and handle all the paperwork but are unable to provide any sort of guidance or investment advice. If you want more information, visit your local bank or brokerage and talk with one of their folks, they are the best advisers for how to move forward on it.

Some useful articles: CNN Money, Business Week

If you’re struggling to decide whether to contribute funds to your retirement or pay down your credit card debt, I have some advice. Think of your retirement like you would a house and the credit card debt as a hole that’s in the middle of your property, before you can build your house you should fill that hole in. That’s how you should approach your retirement plan, with one exception. The only exception to this rule is that if you have a 401k or other retirement vehicle where your employer will contribute funds if you do, you should contribute and get the free money. Beyond that, pay off your credit card debt before you consider contributing more than the minimum or opening an IRA. Credit card debt will pull you down faster than retirement planning will push you up because the interest on credit cards is ridiculous and largely fixed… while you hope retirement investments will increase, that’s not guaranteed (but the debt is!).

If you thought that anyone could contribute to a Traditional IRA and then deduct that contribution on their taxes, you’d be wrong. If your employer has a retirement plan, like a 401(k), then your contribution is not fully deductible unless you fall underneath the income phase out ranges.

In fact, here are the tables:

There are two exceptions, if you are married filing jointly and only one of you has a retirement plan, the phase out is $150k to $160k (if neither has one, there is no phaseout). If you are married filing separately and you have a plan, the phase out is a paltry $0 to $10k.

So, what are you supposed to do if you want to save an extra $20,000 a year towards your retirement and you’ve already maximized the contributions to your 401(k) and Roth? (Should you even contribute more if you’ve maxed out your 401k and IRA?) Well, if you read Walter Updegrave’s retirement columns recently, you would’ve seen that exact question answered by CNN Money’s resident retirement guru. His advice is to put it in a mutual fund and he outlines three ways aptly titled The Easy Way, The Easier Way, and The Easiest Way.

The Easy Way - Tax-Managed Mutual Funds
The easy way involves picking a tax-managed mutual fund where the administrator works to minimize taxable distributions. With your typical actively managed fund, the manager will buy and sell securities to gain a solid return and as a result will create realized gains, which you then must take as distributions and pay taxes on. A tax-managed mutual fund manager will take great pains to minimize realized gains. Walter recommends T. Rowe Price and Vanguard as two places to begin your search.

The Easier Way - Index Funds
If you’ve read much in the investing world you’re probably familiar with index funds - mutual funds that match the holdings of a particular index. Since they match an index, they usually won’t have a real manager, and so you really compete on the basis of price - or the expenses. The “hard” part of index fund investing is picking the right mix of indicies so you aren’t overexposed to a particular market, so take great care in selecting your allocations.

The Easiest Way - Target-Date Retirement Funds
If you don’t like deciding for yourself what kind of mix to buy, have the “experts” do it for you. Not all target date retirement funds are created equal so be sure to do your homework and ensure that their mix is something that you want. This is the “easiest way” because once you pick one that is the right mix, they will adjust it according to risk profiles for your target date (and assuming your age and risk tolerance). The closer you are to the date, the more conservative the fund will be. The only knock against these types of funds is that they aren’t as tax efficient as the other two but you do get the convenience of not needing to rebalance your portfolio every year.

Taxes change, just like investments do, and in order to be prepared for whatever comes through the chambers of Congress, you have to diversify your tax profile. Simplistically, this just means that you need to have good mix of investments that are both tax-deferred and tax-free. For example, a Roth IRA is a tax-free investment vehicle. You put in dollars that are already taxed and your earnings and principal are tax-free when you withdraw them. A Traditional IRA is a tax-deferred investment vehicle. You put in dollars pre-tax and your earnings and principal grow tax free but they are taxed when you withdraw them. What happens if we do away with income tax and instead raise sales tax (a value added tax) across the board?

See, now your Roth IRA comes out of your fund tax free but is then “taxed” when you start buying things. You are essentially double taxed - once on the contribution side and then once when you spend it after withdrawing it. Now let’s say that the income tax is re-evaluated and it is doubled to help pay for nationalized health care… now you’re basically screwed on your tax deferred investments because you’re paying more taxes (and you win on your tax-free investments).

So, the next time you go to plot out your retirement portfolios, remember to not only diversify your investments but also remember to diversify your tax profile!

If you’re over 50 by the end of the calendar year, you’re eligible to make catch-up contributions to accounts like your 401k and IRAs. For 401ks in 2007, that means each year you can contribute up to $20,500, $5k more than under 50 folks. For IRAs in 2007, that means each year you can contribute up to $5,000, $1k more than under 50 folks. Now, you may be thinking that a few thousand dollars for ten years or so won’t make a difference but you’d be surprised at how significant those extra savings can be when it comes time to retire.

For example, if you contribute the maximum of $20,500 every year to your 401k starting at 50 and retire at 60, you’re talking about an extra $600k (assuming a conservative 8% appreciation); and add to the fact that the 401K contribution is pre-tax so it really only “costs” you around $15k. If you do the same with an IRA, you’re talking a cool $145k in fifteen years. If you’re willing to devote the resources required to catch up, it can certainly pay huge dividends down the road.

The Roth 401k was made permanent with the passing of the Pension Protection Act of 2006 last year, though it has been around since 2001, and it does for 401k plans what the Roth IRA did for Traditional IRA plans - it created a vehicle for folks to save after-tax dollars and allow it to grow tax free. With a Roth IRA, you contribute after-tax dollars and the earnings and dividends and everything grow tax free - when you begin taking withdrawals from the Roth IRA near retirement, you will not pay any income taxes on them because you’ve already paid for it. With the Roth 401k, you basically operate under the same premise.

There are some huge differences between Roth IRAs and Roth 401ks:

• The Roth 401k has no income limit! Whereas contribution amounts phase out starting at 99k (for 2007) for Roth IRAs, there is no such limit for Roth 401ks.
• Since the Roth 401k is a 401k plan, it’s subject to those limits - $15,500 for 2007. So, you can contribute a total of $15,500 to a regular 401k and a Roth 401k total.
• Roth 401k’s follow the early withdrawal rules of 401k’s, so there are penalties and such. For example, with a Roth IRA, you can withdraw your contributions at any time with no penalty, but not so with Roth 401k’s. You will be penalized if you withdraw your Roth 401k contributions before retirement age.

Lastly, if and when you do leave your job and contemplate rolling over your Roth 401k, it would go to a Roth IRA - just as how a regular 401k rolls into a regular IRA.