Retirement Savings Accounts – 3 Must Haves!
The key to a successful retirement is saving 15% of your net income for a very long time. Unless you hit it big, a very long time means savings over a 30-to-40 year period. That’s a lot money and sacrifice, so let’s make sure those dollars are in accounts that are the most advantageous to you.
The road to retirement is long, and bumpy; understanding these three important vehicles will make the trip a lot easier – and profitable. Some may be available to you, some may not…but any combination of these will form the foundation of a successful retirement savings plan.
The 401(k) or 403(b)
For most families, a company retirement plan serves a very important role. Common examples are a 401(k), a 403(b) (teachers, nurses, ministers, professors), or a Thrift Savings Plan (TSP plans are for government employees and members of the armed forces). These accounts allow you to put away up to $16,500 a year straight out of your paycheck, before taxes. If you are over 50, you can put away up to $22,000 before Uncle Sam gets his increasingly greedy mitts on it.
Some employers actually match a portion of their workers’ 401(k)-type savings. If you are eligible for a company match, take full advantage of the program. It’s free money! The number of employers that match 401(k) contributions dwindled in the wake of the financial crisis but, with the economy on the mend, we may see a return of this powerful savings supplement.
ROTH IRA – This is the most amazing retirement invention since shuffleboard! A Roth IRA allows you to contribute up to $5,000 per year ($6,000 if you are 50 or older), and withdraw that money to fund your retirement without paying any taxes! Of course there are rules. For example, you must be 59-½ years old before you start withdrawing your Roth savings (contributions plus growth) – without penalty. But in general, the Roth is the best retirement savings deal in town.
You can set up a Roth IRA at your bank, local credit union, directly with a mutual fund company such as Vanguard, or through low cost online brokerage firms like Charles Schwab.
For the record, you can not “buy a ROTH IRA”, but you can establish a ROTH IRA account, in which you will have full choice on how to invest your ROTH funds.
The Traditional IRA – Another retirement must-have. The Internal Revenue Service allows you to contribute up to $5,000 per year to a traditional IRA — $6,000 once you reach age 50. If you are not an active participant in an employer-sponsored plan (like a 401k), you can fully deduct your IRA contribution on your tax return. For example, let’s say you make $50,000 per year and are in the 25% tax bracket. Your $5,000 IRA contribution will result in a $1,250 deduction — 25% of the $5,000. Whether or not you can take a deduction on your contribution gets complicated, so check out this link for IRA Deductibility and Contribution limits
Keep in mind that both traditional IRAs and company retirement plans are similar in that you have tax advantages while accumulating money (before age 59-½), but you are required to pay taxes upon withdrawal. With the ROTH, you don’t receive an upfront tax deduction, but distributions in retirement are TAX-FREE.
I can’t tell you exactly how to employ these various savings tools, as that mix will depend on your family’s unique circumstances. But I can tell you to start using some combination of them today. I’ve never met anyone who felt that they saved too much in one of these three tax-advantaged accounts!
Wes Moss is a certified financial planner and is the Chief Investment Strategist at Capital Investment Advisors in Atlanta. Moss is also the host of “Money Matters” on AM 750 and now 95.5 FM News Talk WSB on Sundays from 9 a.m.-11 a.m. An author, “Apprentice” alumni, husband and father, Moss is committed to helping Atlanta’s citizens with financial health.