3 Ways to Save for Retirement

According to Forbes only 1 in 3 Americans have anything saved for retirement. There are 10,000 baby boomers turning 65 every day over the next 20 years. If only 1 in 3 have saved anything, that means only 3,333 of that 10,000 have saved for their retirement. That’s alarming, especially since the IRS has several plans available for stashing money away.

Here are a few of the plans and the amounts you can contribute to.

The first plan is your traditional 401k at work. Most employers offer this as a benefit for working for their company. In fact, 42% of employers offer a dollar for dollar match to employee 401k contribution meaning if you are contributing 5% of your pay into your 401k, your employer is contributing an additional 5% to that account. If you work for an employer who matches your 401k contribution that is something you need to enroll in stat. Go into work tomorrow and enroll; that’s free money.

Retirement plans outside of your employer are called Individual Retirement Plans or IRAs. The IRS introduced these plan with the Employee Retirement Income Security Act of 1974, or ERISA, and they have steadily grown in popularity over the years. As a way to incentivize retirement savings, the IRS allows each individual to contribute $5,500 per year into this account and deduct that from your annual income on your tax return. If you are over the age of 50 you can contribute a “catch up” amount and contribute a total of $6,500. The deadline for each year’s contribution is April 15th, the tax year deadline. It is important to note that in order to contribute to an IRA you must have “earned income.” The IRS does, on the other hand, allow for a “spousal IRA” contribution where a non-working spouse can contribute to their own IRA as long as the other spouse has earned income.

The next retirement account available to you is the Roth IRA. It carries the same contribution guidelines of $5,500 for those under age 50 and $6,500 for those over age 50. The value of the Roth IRA is that gains are tax free when the money is withdrawn, provided the account has been open for 5 years and you’re over 59 ½ years old. To contrast, when you withdraw money from a traditional IRA the amount is fully taxable at income tax rates. While you do not get the immediate tax deduction for the contribution like you do with the traditional IRA contribution, the withdrawn money is fully taxable. This is incredibly valuable. When you plan for retirement, it is a good idea to know what the tax implications will be with each scenario, because it’s hard to know what the income tax rates will be in the future.

Some of these plans have income restrictions. In other words, some of you who are reading this make too much money to contribute to some of these accounts. Roth IRAs, for example, have income restrictions. If you make over $200,000 in 2018, you are ineligible to contribute to a Roth IRA.

Determining what option is best for you can be difficult. Should you open a traditional IRA or a Roth? Should you contribute the max? If not, what amount should I contribute? These are questions that can be answered by a CPA or other financial professional. Generally speaking, I always suggest contributing the max that you can.

If you have any other questions regarding any of these retirement savings account options or if you’d like a referral to a CPA in our area, please don’t hesitate to reach out.

*This article originally appeared in the April 2018 Pasadena Voice newspaper.