The days of pension plans are long gone for most companies. These plans essentially stated that if an employee worked a specified amount of time for a company then they would be paid a specific amount of money for their retirement. For example, a company could say if you work for 25 years with us, we will pay you $5,000 a month for the rest of your life. In some cases, that amount would even transfer to your spouse upon your death. Again, those days are long gone.
These days, employees are more and more responsible for their own retirement savings. If you do not save it – then you do not get it. Fortunately, there are several types of accounts that help with this problem. The government provides a tax advantage for these accounts as well, further encouraging citizens to save up for their retirement years. Here are multiple types of accounts that benefit those looking to save for retirement.
A 401k plan is typically offered by an employer, however, can also be set up by a self employed individual. The benefit of 401k (a similar plan for non-profit employees like teachers is called a 403b) is that it is deducted from your pre-tax income. This allows you to save more by not having the savings taxed and by having less taxable income overall. There are restrictions on how much you can save per year ($18,500 this year, or $24,500 if for those over 50 years of age), limiting the amount of tax deferred savings you can contribute to these plans. As an extra benefit, many companies offer a “match” by percentage (i.e.: If you save 5% of your pay, we will also contribute the same 5% to your account).
A traditional IRA (individual retirement account) presents the opportunity to contribute to an investment account that grows tax free. As usual, there are limitations to such a tax benefit ($5,500 per year or $6,500 for those over 50 years of age). Any IRA contribution is tax deductible, unless you are adding to both a 401k and IRA, and you make of $71,000 per year. If you make less than this amount, or do not contribute to a plan at work, then you can deduct the full $5,500 per year from your taxes. The IRS demands that an individual withdraw the funds from traditional IRAs at age 70, so you cannot continue to contribute and earn tax free interest.
The benefits to a Roth IRA are different from a traditional IRA. Like an IRA, contributions are made after tax. However, you cannot deduct your contributions from your yearly income tax filings. The upside to a Roth IRA is that you can withdraw penalty free beginning at age 59 ½ and there is no mandate that the money be withdrawn at age 70. Another benefit is that you can withdraw the amount you have personally contributed (total minus interest earnings) penalty and tax free. The annual contribution limits are the same as a traditional IRA.
While planning for retirement and squirrelling money away seems daunting, it is certainly worth it in the long run. As you can see, there are many plans to help those hoping to one day retire with saving for that day.
Contact Rosie for a referral on set-up and administration of a 401K plan. A 401K plan benefits you and your employees, and could be vital to recruiting a promising employee. Competition for attracting good, qualified employees is tough these days.