It’d be nice to have retirement GPS but they won’t be adding that to Google Maps anytime soon. America’s largest generation–the baby boomers–are lost and it’s going to have an impact on their retirement. If there’s anything younger generations should learn from their parents financial blunders, it’s to start saving early and often!
Saving for retirement is a necessity, especially with the growing concerns surrounding Medicare and Social Security. A great place to start is with an employer sponsored retirement plan such as a 401(k) or 403(b). If your employer offers a match it’s a no-brainer, participate in the plan and contribute at least enough to take advantage of the full match. In 2016 the maximum you can contribute to a 401(k) is $18,000 with a catch up provision if you’re over the age of 50 to save an additional $6,000. These days there are more features available inside of retirement plans to help you make smarter investment decisions and monitor your progress. If you have questions about your retirement plan contact the plan provider (the fees that come out of your account pay for their services, use it) or speak with a qualified financial advisor. Saving through a retirement plan at work is a great foundation, but your options are limited and there are more ways to save and invest for your future.
An individual Retirement Account (IRA) could be a great option for you to consider. These types of accounts provide tax benefits and savings opportunities in two different ways. In 2016 you can contribute $5,500 to your IRA with a catch up provision if your’e over the age of 50 to save an additional $1,000. The Traditional IRA has been around the longest, aside from providing a means to save for retirement it can be used as a tool to reduce your taxes in years which you make contributions. Money you contribute to a Traditional IRA is like taking income you received during the year and putting it off to the side so you don’t have to pay income taxes on it right now. If you qualify, this simple deduction could place you at a lower marginal tax rate, overall reducing your income taxes. Additionally funds invested in a Traditional IRA grow tax deferred; meaning the growth in the account also isn’t taxed until you take a withdrawal. When you do begin taking distributions they will be taxed as income for the year you are taking it. Keep in mind, this was income that you put off to the side years ago and never paid taxes on. Because of this, when you reach age 70½, the IRS requires you to take distributions from the account. These Required Minimum Distributions (RMD) are based on your age and the account value at the end of the previous year.
Beware of early withdrawal penalties! If you take distributions before age 59½ from a tax deferred savings account (yes this applies to your retirement plan at work too) the IRS will slap you with a 10% “early withdrawal” penalty. Remember, these special accounts provide tax benefits to encourage long term saving for retirement, if you don’t play by the rules, their going to make you pay for it.
Their’s another type of IRA account which arguably provides you with the best tax benefit… tax free withdrawals! The Roth IRA came about in 1997, and is considered the most significant change to IRA legislation since its creation in 1974. The Roth IRA has several advantages compared to its predecessor. Unlike a Traditional IRA, you don’t receive a tax deduction when making contributions, but the money still grows tax deferred. The benefit is that your invested money grows over time and when you take distributions, they are tax free. Yes that’s right, NO TAXES! Another advantage of the Roth IRA is the absence of Required Minimum Distributions. Although the Roth IRA offers appealing tax benefits it isn’t for everyone. The contribution limits are the same as the Traditional IRA, but eligibility requirements restrict contributions if your income exceeds certain thresholds each year.
If you implement these savings strategies you’ll have a much better shot at accumulating and diversifying your retirement investments. If you’re still not saving for retirement don’t expect someone else to do it for you. You may get some help from the government, but that won’t get you very far. The key to saving is doing, start small and work your way up if you have to. The longer you save the larger the nest egg.