Retirement planning is a daunting process, and with COVID-19 playing havoc on the stock market, causing 401(k) and IRA balances to plunge, it doesn’t make the process any easier. Due to the coronavirus outbreak, experts predict that another recession might be around the corner.
If you want the coronavirus situation to have a minimal impact on your retirement plans, here are some thoughts and ideas, depending upon where you are in your retirement schedule:
You are already retired.
Allow the income planning and generation process to run its course. If you have planned your retirement well and if you have a strategy for retirement income in place, keep the strategy. Your income strategy is designed to withstand the market fluctuations.
However, if you don’t have an income strategy or not sure where you are heading, it’s a good time to talk to your financial advisor.
You plan to retire in the next 10 years.
By now, you probably have assets arranged for future income. If you haven’t, please think twice before selling any of your assets, especially stocks. It’s not a good time. However, at this point, use the time to review the retirement planning you have already done.
You plan to retire in more than 10 years.
Take this as an opportunity to keep doing what you are doing – hopefully, making regular contributions to your retirement accounts. If you continue to make regular contributions, you are actually using dollar cost averaging to your advantage. Your contribution today will buy more shares than it did a month ago. Ride the curve back up.
Here are a few tips that will help you navigate these uncertain times:
1. Flexibility is the key.
The recent stock market crash may have changed your thougts about your retirement plan. If you were hoping to retire this year or next year, you might have to rethink your decision until the market recovers. However, it’s too early to tell when the full recovery might happen, but you need to be flexible. This situation may be an opportunity in disguise. For example, delaying your retirement may give you another year to boost your benefit and lock in a higher payment for life.
2. Think twice about selling your stocks.
At a time like this, it may be tempting to sell your stocks. Unloading your stocks when they’re down is a sure way of locking in losses. While it may be heart-wrenching to see the numbers dropping, you need to keep calm and not make rash decisions.
With the uncertainties that are prevailing in the world today, mapping out your retirement can be a stressful situation. The best thing you could do right now is to not panic and be flexible to make changes as the situation demands. Be mindful of the fact that this situation, too, shall pass. And when the market recovers, you’ll be in a stronger position to retire than before.
3. Keep cash reserves.
The recent market crash has taught us how important it is to have cash reserves at all times. Ideally, if you’re close to your retirement, you should have cash in your savings account, large enough to cover a year of your living expenses. Apart from that, you should ideally have emergency savings to cover your unexpected expenses.
4. Keep your future in focus.
Currently, the stock market is in pretty bad shape. But, it has a strong history of recovering. So, don’t panic or keep checking your IRA or 401(k) balance almost every day. Rather, focus on excelling at your job and plan the things you can control and things you’ll do once you retire. And don’t forget to continue funding your IRA or 401(k) retirement accounts.
Due to the market downturns, now is also a good time to invest on the cheap while sticking with your scheduled retirement plan contributions. So, when the situation becomes normal, you are in a better place financially.
Whether you are 25, 45, or 65, you should have a retirement plan that’s designed to withstand market volatility. If you don’t have a plan, the current market scenario has taught us that the time to get serious about retirement plans is NOW. Call (866) 639-0066 for retirement advice during coronavirus pandemic now!
Congress wants to force your heirs to take out your IRA within 10 years.
I want to give you at least 30 years. . . maybe even more.
Hi everyone, my name is Rick Pendykoski. For over 20 years I’ve been helping people learn the best ways to manage their retirement money. That is why when I read the latest tax law changes in the SECURE ACT. I was mad. Really mad.
Once again Congress has created a new law that forces people to overpay their taxes. Instead of incentivizing people to save money and build for their future, Congress wants to make sure they can tax your retirement plan within 5 or 10 years of your death.
That means those of you who planned on your family being able to stretch out the distribution of your retirement assets over their lifetimes, they are going to have to take much larger distributions each year. Because the distributions are going to be larger, the tax brackets are going to be higher as well. No one wins here except our do-nothing Congress!
Well, I have a secret for you. There is a way that you can use a trust to stretch out the payments for another 20 years at least. Now instead of your retirement money coming out in large clumps, just to be decimated by taxes, your kids can take over 30 years to spend down your earnings.
What is the Secure Act?
The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement Act of 2019, was approved by the Senate on December 19, 2019, and was signed into law on December 20 by President Donald Trump.
The Secure Act came into effect since January 1, 2020, and it includes significant provisions that will prevent older Americans from outliving their assets.
How Will Secure Act Affect Your Retirement?
The Secure Act will inevitably affect many retirement account holders; the most immediate impact will be felt by those who have retired or nearing it. If you’re a saver or investor in your 50s or 60s, here are a few of the most significant provisions that you should be aware of:
1. Required Minimum Distribution Age Increased
Previously, 401(k) or IRA account holders had to withdraw required minimum distributions (RMD), when they turn age 70½.
With the implementation of the Secure Act, the RMD age has increased to age 72. However, this rule is only applicable to people who have not yet reached the age of 70½ by the end of 2019. People who already are 70½ years by the end of 2019 must withdraw their required minimum distributions this year; otherwise, they’ll attract a 50% penalty of their RMD.
2. Age limit for making Traditional IRA contributions eliminated
As life expectancies have increased, and more and more people continue employment beyond traditional retirement age, the Secure Act eliminates the maximum age for traditional IRA contributions. It also allows people of any age to continue contributing for as long as they are working (which previously prohibited people from contributing after they’ve reached age 70½, even if they were still working), thus enhancing their long-term retirement financial security.
3. Additional Roth IRA Planning Opportunities
With the increase in RMD age, the account holders have an additional two years to carry out Roth IRA conversions without worrying about the impact of required distributions. Converting to Roth allows the account holder to convert taxable money in an IRA into a Roth IRA by paying lower taxes than what they would be paying in the future.
4. “Stretch IRA” technique is eliminated
The term “Stretch IRA” describes a technique that a beneficiary uses to extend distributions from an inherited IRA over his or her lifetime. While stretch IRA allowed young beneficiaries to extend the payout over the decades, it also enabled them to spread out the payment of income taxes over a long period of time.
The Secure Act effectively eliminated stretch IRAs. For any deaths occurring after December 31, 2019, the beneficiaries must fully withdraw the funds from inherited IRAs within ten years of the account owner’s death.
However, the Act exempts certain kinds of beneficiaries from this rule: a surviving spouse, minor children, beneficiaries who are not more than ten years younger than the account owner, and those who are chronically ill and disabled. However, grandchildren of the account holder are not included among these exemptions.
5. Annuities as investment options in 401(k) plans
Considering the fact that Americans now live longer lives in retirement, annuities provide a guaranteed income over the course of a retiree’s lifetime.
The Secure Act allows more employers to provide annuities as investment options within 401(k) plans. Previously, the employer held the fiduciary responsibility to ensure the investment products are appropriate for employees’ portfolios, but under Secure Act, the responsibility of providing proper investment choices is now on the insurance companies, which sell annuities.
6. Encourages auto-enrollment
Auto-enrollment is effective in making people save more for their future. The Secure Act offers a tax credit to small employers (on top of the start-up credit they already receive) to offset the costs of auto-enrolling their workers into a 401(k) plan or SIMPLE IRA plan.
7. Easier for small businesses to form Multiple Employer Plans (MEPs)
Many small businesses are hesitant to offer a retirement plan to their employees because of compliance issues and high administrative costs. Multiple Employer Plan (MEP) allows small firms to collaborate and offer a retirement plan by sharing a plan administrator and administrative duties and reducing the costs. However, for businesses to join together, it requires them to have a common connection — for example, being in the same industry. So, many small businesses cannot collaborate with other businesses because of the lack of connection or similarity. With the Secure Act in effect, these rules are relaxed, making it easier for unrelated businesses to form an MEP.
8. Part-time workers can participate in 401(k) plans
Previously, employers excluded part-time employees from participating in 401(k) plans. But now, under the new rule, people who have been working for the employer for three consecutive years investing at least 500 hours or worked for at least 1,000 hours in one year is eligible to participate in retirement plans.
Secure Act and RMDs
|Value of Inherited Account|| || ||$1,00,000.00
|Est Rate of Reurn||6%
|Year||Before Secure Act||After Secure Act
|One||$2,923.98 ||RMD Amount||$10,000.00
|$1,02,900.58 ||Remaining Value||$95,400.00
|Two||$3,099.42 ||RMD Amount||$10,600.00
|$1,05,789.23 ||Remaining Value||$89,888.00
|Three||$3,285.38 ||RMD Amount||$11,236.12
|$1,08,654.08 ||Remaining Value||$83,371.12
|Four||$3,482.50 ||RMD Amount||$11,910.16
|$1,11,481.87 ||Remaining Value||$75,748.62
|Five||$3,691.45 ||RMD Amount||$12,624.77
|$1,14,257.85 ||Remaining Value||$66,911.28
|Six|| $3,912.94 ||RMD Amount||$13,382.26
|$1,16,695.60 ||Remaining Value||$56,740.76
|Seven||$4,147.72 ||RMD Amount||$14,185.19
|$1,19,586.95 ||Remaining Value||$45,108.90
|Eight||$4,396.58 ||RMD Amount||$15,036.30
|$1,22,101.79 ||Remaining Value||$31,876.96
|Nine|| $4,660.37 ||RMD Amount||$15,938.48
|$1,24,487.91 ||Remaining Value||$16,894.79
|Ten||$4,940.00 ||RMD Amount|| $16,894.79
|$1,26,720.78 ||Remaining Value||$16,894.79
| $38,540.34 ||Total RMD's|| $1,31,807.95
|RMD Difference to the Feds||$93,267.62
401k retirement plans began almost by accident in 1978. Yet today for many of us 401k plans play an important part of our retirement plans. According to the Investment Company Institute as of March 2019 there were $5.7 trillion invested in
A 401k retirement plan like every investment requires proper planning and management. That includes
understanding 401k word definitions, determining investments and selection of plan beneficiaries.
Who you choose to be a beneficiary is often an afterthought. We don’t plan on dying any time soon so who we select as a beneficiary is probably just academic. But there are a number of good reasons to choose carefully. Let’s examine some common questions about the subject.
Author Bio: Gary Foreman is a former financial planner and the editor of TheDollarStretcher.com and
After50Finances.com. His After50Finances email newsletter shares ways to make the money you worked hard for work harder for you!
Setting up a Self-Directed IRA is a smart move to secure your future. A Self-directed IRA is a versatile retirement plan that lets you invest in a wide range of profitable assets unlike traditional retirement accounts. But this same lucrative IRA account can prove to be a financial disaster for you if you don’t do your due diligence.
So if you don’t want to fall victim to costly mistakes that most people make, avoid these 6 pitfalls
Using a Self-Directed IRA for Personal Use or for a Disqualified Person
This is the most common problem that self-directed IRA account holders face. As a rule, an account holder cannot use the funds in their IRA account for personal use or for a small group of people who are considered disqualified persons. Generally, the group consists of the account holder, spouse, children, grandchildren, parents, grandparents and their spouses. A disqualified person cannot receive any immediate benefit nor extend any immediate credit to the plan.
For instance, account holders are prohibited to purchase a property for personal use using their retirement funds. The same rule prohibits IRA account holders to give loans to a disqualified person or have any business dealings with any person who can benefit directly from the loan including family, personal connections, and friends.
Not Knowing the Types of Investments Allowed in a Self-Directed IRA account
Setting up a self-directed IRA gives you the freedom to invest in alternative assets but it is very important that the IRA account holder has complete clarity on the allowable investments. One more thing that account holders need to be updated with, is the off-limits issued by the IRS. There are three investments which are prohibited transactions – life insurance contracts, collectibles and shares of an S Corp.
Not Staying Updated on the Prohibited Transactions
It is also very important to have thorough knowledge of prohibited transactions as they can disqualify your IRA account immediately with your lifelong savings in it! If the IRS identifies that an IRA investor is involved in a prohibited transaction then it may be treated like a distribution and taxed with additional penalties for an untimely distribution. You run the risk of having your entire fund can be disqualified. The best way to safeguard your fund is to consult a financial advisor when you are investing in different alternate assets.
Not Doing Your Research Before Setting up a self-directed IRA
One of the biggest pitfalls of IRA account holders is also the easiest to avoid: lack of knowledge. So before setting up a self-directed IRA, do your due diligence and educate yourself. A few questions that you would want to find answers to include the following:
- Is your financial portfolio diversified between the traditional and non-traditional world?
- Are you sticking to specific investments that involve more risk?
- Are the assets you want to invest in, approved by the IRS?
- Are your contributing too much or too less to your IRA account?
- Who are the custodians of your IRA account?
- Do you have a financial advisor to give you expert guidance?
You should have answers to all of these questions before setting up a self-directed IRA.
Mismanaging Repairs and Upgrades of a Real Estate Property
There are certain rules that apply to a self-directed IRA for governing how the account holder pays for repairs and renovations made to any real-estate property in the IRA account. You are not allowed to pay out of your own pocket or from the earnings of your personal assets. You are allowed to manage the repairs but you should not do them yourself.
Choosing the Wrong Self Directed IRA Custodian
If you end up with a wrong type self-directed IRA custodian, your entire IRA experience becomes more risky and complex. So before choosing a self-directed IRA custodian, make sure you check their license and registration against the state regulatory resources. Also read through and understand their fee structure. The right custodian will guide you through the complexities of setting up a self-directed IRA and protect you from the pitfalls of prohibited transactions and frauds.
When you are investing money to secure your future, do it with an expert and make sure that your retirement dollars are giving you the maximum possible returns. Self-Directed Retirement Plans LLC has helped thousands of clients take check book control of their retirement funds for over 15 years. Call (866) 639-0066 today for honest advice on how you can make the most of your money without making costly mistakes!
Choosing IRA custodian is crucial for maintaining the tax-free status of your IRA account. The type of custodian you choose will depend on the IRA account you choose to invest in. Traditional IRA accounts may not need an extra effort for choosing IRA custodian but if you plan to explore non-traditional investments then you need a self-directed IRA custodian to diversify your financial portfolio.
Tips for Choosing IRA custodian
Your chosen IRA custodian can either be an IRS-approved, non-financial firm or a financial institution given IRS approval. And if you are choosing a bank for setting up your IRA account, then the bank becomes your IRA custodian. The same stands true if you invest in a certain mutual fund family. Using such IRA custodians will save you a lot of money as their fees are relatively lower in comparison to institutional accounts.
But, if you are choosing IRA custodian for a self-directed account, then make sure you choose an IRA custodian keeping the following 5 factors in mind.
- A Wide Range of Investment Options
The bigger the assortment of alternate investments, the more options you have to diversify your funds. So if you want to invest beyond stocks, bonds, ETFs and mutual funds, then your chosen IRA custodian should be able to help you look for non-traditional options like real estate and privately held companies.
- Low Maintenance Fees
Fees come in various forms – annual maintenance fees, commissions for making trade, loads for mutual funds and the like. So, if your chosen IRA custodian charges a certain type of fee, check if it is uniform across custodians because these fees are not a “given”. And if you are investing in mutual funds, make sure your custodian offers different types of no-load mutual funds.
- Knowledgeable About the Rules
If you have multiple IRA accounts then according to experts, you should consolidate your accounts into one fund and delegate a single IRA custodian. Your IRA custodian should be knowledgeable about the rules of the IRS, the rules based in tax law, and also know which types of IRA accounts cannot be consolidated.
- No Restrictions on Investments
Certain IRA custodians limit your investment options because the nature of their charter is restricted. These limitations may not be the same as the restrictions imposed by the IRS. So, make sure you choose an IRA custodian with no restrictions. When you are opening an IRA account, make sure your choice is based on the type of account you prefer – Traditional or Roth. If you want to diversify your portfolio then a self-directed IRA will give you the freedom to take check book control of your finances.
- Prompt Services
Unless you are fine working with a robot advisor, easy access to a knowledgeable and experienced financial advisor is very important. When you are managing a self-directed IRA, a vague or incomplete answer is the last thing you’d want to deal with.
Self-Directed Retirement Plans LLC offers flexible retirement plans with multiple investment options that include asset protection, prompt support, limited custodial fees and complete check book control. Call (866) 639-0066 today to learn about alternate investment vehicles that will quadruple your retirement savings.
You may not be a millionaire, but you may have reached a stage in life that makes you think that you have done all you possibly can to have a blissful retirement.
You are fortunate that your retirement planning has accumulated more than you need. Probably you don’t need to rely on IRA or 401(k) plan; your pension and Social Security benefits are enough to sail you through your retirement smoothly.
So, because you don’t need the money held in IRA or 401(k), it gets piled up. But IRS doesn’t want you to keep your money as it is in your retirement accounts. When you turn 70½, the Required Minimum Distribution (RDMs) kicks in. This means you have to withdraw a certain percentage from those tax-advantaged accounts each year, whether you want it or not. The worst part of it all – the percentage increases as you age.
And If you fail to withdraw the RMD, you may need to pay 50% of your Required Minimum Distribution amount each year as a penalty.
However, the issue is taxes. If you wish to gift your money to your child or your loved ones, you have to pay income taxes on what you withdraw, and also pay tax if you let the amount stay in the accounts as it is.
Here is how your IRA or 401(K) can become tax free gift for your loved one.
#1 Gift money after reviewing the gift tax rules
Beginning in 2018, you can gift up to $15,000 (or $30,000 if you’re married) to a person in a year without IRS interfering with your transaction. If you are gifting more than that amount, you need to file a gift tax return. That doesn’t mean that you have to pay a tax on the gift. It means that $15,000 is eligible for lifetime exclusion. This is the amount you can gift away during your lifetime without incurring a gift tax. The total lifetime tax exclusion for gifts is $11.2 million per individual; so, gift tax rules are not much of a concern for most people.
#2 Convert your retirement savings into a life insurance policy
Convert your retirement savings into an income tax-free gift (life insurance) for your spouse, children or grandkids.Here’s how it works:
- You can withdraw the RMDs from your IRA. Pay the tax applied on distributions. The balance amount, you can use to pay the premiums on a life insurance policy. By doing so, you are turning a 100% taxable investment into 100% tax-free.
- If you gift your IRA or a 401(k) to your loved ones, other than your spouse, they have to take distributions the next year, whether they want it or not. And if they are withdrawing, then they have to pay taxes on the withdrawals. The best part of life insurance is that the beneficiary doesn’t need to pay taxes on the amount they receive. It is a true gift.
#3 Can you gift money from an ira without paying taxes.
Let your children inherit your IRA. While you are alive, you have no tax benefit to gifting an IRA. Rather, consider passing it on as part of your estate plan. If your kids inherit your traditional IRA, you get to avoid the taxes while they benefit from the funds you have saved for years. However, they need to pay income tax on the amount they withdraw. A Roth may be a great way to leave your money to your kids without them paying the tax because you have already paid it.
Tax rules involved in the gifting your retirement money to your family or loved ones can be confusing. If you need more information, call (866) 639-0066 for expert guidance.
When the market goes erratic, it’s only natural for people who are close to retirement or already in retirement to get anxious. It then boils down to one single question. Do my retirement accounts have sufficient funds to last through your retirement?
It’s brutal, isn’t it? You invest in 401(k) plans and IRAs to build up your nest egg only to see it destroyed with one market gyration.
It’s heart-wrenching to see people who have planned for a financially secure retirement ending up losing their assets due to unforeseen market fluctuations or events.
Some of the unforeseen or unknown events that can affect your retirement funds are:
• Your life expectancy
• Inflation rates
• Healthcare costs
• Investment risks
There are ways you can stretch your retirement savings for almost as long as the years in which you accumulated those investments. Read on to know more.
1. Figure out When You Want to Retire
While 65 years is the retirement age, a survey by Willis Towers Watson says that nearly one in five Americans work beyond age 70. Delaying retirement has several benefits:
• It gives you the opportunity to save more for retirement and continue investing in your employer retirement accounts like 401(k).
• It helps you to delay withdrawing from your retirement savings.
• You can also take benefit of the employer’s health insurance coverage.
• It helps you to reduce your overall debt, such as credit card debt, and even your mortgage.
2. Consider Working Part-Time
If for whatever reasons you can’t work full-time during your retirement years, you can earn income from a part-time job.
Working part-time not only helps you financially but also keeps you physically and mentally active. However, you need to keep your skills up-to-date to be employable.
3. Tap in Social Security Benefits at the Right Time
If you want to stretch your retirement funds, don’t claim your Social Security benefits as yet. Delaying it can provide a long-term boost to your retirement funds.
A mistake most people make is that they start taking their benefits as soon as they step into retirement. The longer you wait, the better it is for your bottom line. Each year you delay claiming your benefits, they increase by 8% until age 70.
4. Strategize Your Spending
The key to making your retirement fund stretch is to have a budget. Cover your fixed expenses with your Social Security benefits, an annuity or a pension. Try not to withdraw from 401(k), IRA or other retirement accounts for discretionary spending.
• Reduce spending if the market fluctuates.
• Schedule withdrawals strategically. You may want to take help from a financial advisor to help structure your withdrawals so that you minimize your tax bill.
If you don’t have a tax strategy, it can cause a substantial dent in your retirement savings and affects its longevity.
5. Diversify Your Investments
Here are some tips on how you can diversify your investments
• Keep some cash as an emergency fund. So, if at all you face an emergency, you do not have sell stocks at a loss when the market is low.
• Do not over-invest in the employer’s stock.
• Make sure you have a good mix of stocks, mutual funds, and fixed-income bonds.
• Consider keeping an annuity in your portfolio. It can provide guaranteed lifetime income for some, if not all your fixed expenses.
• Consider seeking help from a professional advisor if you’re unsure about your investment allocation.
Retirement planning is more than just saving. It is more about making your savings last long enough for you to have a long and comfortable retirement.
Are you ready to make your retirement savings last for long? Then, we need to talk. Call Self Directed Retirement Plans LLC today!
Is your military pension enough for your reitrement?
Many servicemen concentrate more on their current activities than worry about military retirement. They join the military force hoping that they will retire after 20 years of service with a pension for life. However, stats say that less than 18% stay in service that long to qualify for a military pension.
While many companies offer their employees phased-out pensions plans, servicemen get nothing in pension if they leave their jobs before they complete 20 years.
If you do complete 20 years of service, you’ll get a pension amount that is 50% of your base pay. For each additional year, you serve your pension increases by 2.5%.
While this may seem like a generous retirement scheme, it may not be enough money to take care of you and your spouse in retirement. You can use the military retirement calculator available online to check whether the military retirement pension amount is enough for retirement.
Regardless of whether you stay for 20 years in service or not, whether you have a pension or not, it is essential that you save on your own.
While you are in the military, you can take advantage of these special investing programs and tax breaks to supercharge your savings.
Here is how you can save for your retirement when your military pension is not enough.
- Blended Retirement SystemThe government has introduced a new military retirement system on January 1, 2018, which is designed keeping in mind the servicemen who don’t stay in service for 20 years. This is called the Blended Retirement System (BRS).Anyone who joins the military from January 2018 gets automatically enrolled in BRS. The BRS allows you to choose a Thrift Savings Plan (TSP), a pension only, or both with a reduced pension.
- Thrift Savings Plan
Thrift Savings Plan is similar to a 401(k) plan. It is a great place to start saving. 1% of your base pay automatically is contributed to a TSP. You can also contribute another 4% to get a total 5% match.The TSP has valuable tax advantages. Irrespective of how much you can afford to invest, you can tax breaks now or build up tax-free income for the future. You can choose between a traditional TSP, where you make the contributions with pre-tax income, a Roth TSP, where you contribute after paying the income tax, or a combination of both.TSP has very low costs. For every $1,000 you invest, you pay only 40 cents.
- Tax-Free Earnings From a Roth IRA
A Roth IRA can be a great supplement to your retirement savings. You do not get a tax break for Roth contributions, but you can enjoy tax-free withdrawals in retirement.If you are a deployed servicemember, you have an advantage – while you are in the combat zone, if your pay is tax-free, the money that goes into Roth IRA is also tax-free. Moreover, the earnings that you withdraw in retirement also are tax-free.You can invest the maximum in both a Thrift Savings Plan and a Roth IRA in the same year. Finally, if your spouse doesn’t have an income, you can contribute to an IRA on his or her behalf.
If you need guidance on how to safeguard your financial future and supercharge your military retirement savings, call (866) 639-0066.
Most of us build a retirement savings plan, but is this enough to live comfortably during the retirement? Balancing your retirement funds can be extremely difficult, given that your daily expenses rise as you age.
Just like it was mentioned in a recent Self Directed Retirement Plans’ blog post, for the majority of Americans, living past 85 years would be financially difficult. So, no matter if your retirement is still decades away or it’s approaching quickly, you need to plan and use your retirement fund strategically.
Here are a few tips that will help you do so.
Invest in the Right Retirement Plan on Time
Concerned about their student debt and bank loans, young people usually don’t think about their pension on time. According to the Bureau of Labor Statistics’ National Compensation Survey, only 15% of private-sector employees have a pension plan, while 44% of them have a retirement savings plan.
The perception of workplace retirement plans has also changed. The same report says that only half of employees in the private sector had a workplace retirement plan in 2017.
With the traditional pension benefits disappearing, your goal is to start saving up and preparing for your pension on time.
Start with a 401(k) plan.
The 401(k) plan that is financed through your contributions either via pre-tax or post-tax. The major benefit of this plan for employees is a high annual contribution limit that goes up to $19,000 for those under age 50 and $25,000 for people aged 50 and above.
Before you start contributing to 401 (k), always make sure your employer offers match programs. This means that a company contributes the additional sum of money to your account each time you make a contribution.
Open a Traditional IRA
If your employer doesn’t offer a company match, then skip 401 (k) and consider investing in IRAs, especially traditional ones.
Employees usually decide for traditional IRA plans, especially if they want to save money on taxes on their contributions. There are numerous significant benefits of traditional IRA plans
- Anyone can open and contribute to traditional IRAs – there are no income limits.
- It provides wide investment opportunities.
- Your investments are tax-deferred until you start withdrawing funds. A traditional IRA also allows you to deduct your contribution and save money on taxes upfront.
- You can invest in a traditional IRA even if you if already have a workplace pension plan, such as the abovementioned 401 (k).
- There is a limit to contribution amounts. In 2019, the traditional IRA contribution is up to $7,000 if you’re 50 or older
Additional IRAs to Consider
- Roth IRA – This plan requires paying taxes on contributions you make. Still, you will reap its benefits later, given that you won’t pay tax on withdrawals.
- Simplified Employee Pension (SEP) – designed for self-employed people and business owners.
- Self-Directed IRA provides numerous investment options for your retirement fund. These include residential real estate, commercial real estate, stocks, bonds, mutual funds, currency, etc.
- Savings Incentive Match Plan for Employees (SIMPLE) IRA is particularly important to small businesses. Workers can contribute a certain sum of money to their SIMPLE IRA funds and their dollars will grow at the determined interest rates.
How to Save Up and Use your Money Wisely after Retiring
When planning your retirement fund, you need to consider your current lifestyle and ask yourself if something is going to change once you retire. Knowing your lifestyle, you will be able to predict your expenses and determine whether they’re realistic when compared to your retirement income.
It’s also a good idea to plan your retirement pessimistically. Taking your worst-case scenario into account, you will be able to prioritize your expenses and make wiser decisions.
- Estimate your future medical costs. As you age, your medical expenses will also grow. That is exactly why you should consider creating a health savings account to cover your medical expenses, as well as invest in a comprehensive, long-term medical insurance.
- Know where you can save up. Seniors enjoy numerous benefits when it comes to payments. For example, when traveling, you can use seniors travel insurance that will cover most of your medical care costs, protect you against lost belongings, and even provide notable discounts or bonus days.
- Cut where it doesn’t hurt. Are you still paying for that family membership at the gold club no one uses? Or, if your home is expensive to maintain, why not downsize?
- Focus you 401 (k) and IRAs on safer investments. Many seniors decide to invest in stocks just to find out that their returns are not satisfactory. Remember that age is not on your side, so choose investments that will generate regular income and keep your funds safe. According to The Economic Times, some of these options could be tax-free bonds and mutual funds.
- Know when and how to withdraw money from your retirement savings accounts. Just like I’ve mentioned above, when taking distributions from your traditional IRA account, you will need to pay a tax on withdrawals. Always make sure that you’re not withdrawing cash from an IRA at the same time you’re getting Social Security benefits. Otherwise, you will face high tax brackets.
Unsurprisingly, the sooner you start preparing yourself for retirement, the better off you will be. If you’re still a few decades away from retiring, this is a great opportunity to start investing in the right retirement plan and saving up. On the other hand, if you’re close to pension, then strategize your investments, choose the right insurance coverage, and minimize costs on multiple levels.
Guest Post – Keith Coppersmith is a business journalist with experience in numerous small businesses and startups. A regular contributor at Bizzmarkblog.com, he enjoys giving advice on both marketing and financial strategies.
Earlier, private sector employees were depending on their employers to provide them defined pension benefits. In the 1980s, a good 60% of employees were entitled to receive pension benefits from their employers, but in 2017 the number dropped to only 4%. With the conventional pension schemes quickly fading, the pressure is now on the 401(k) plan to help you sail through your retirement.
How much you need to save to maintain your current lifestyle in retirement
To maintain the lifestyle, you are enjoying today in your retirement, it is important that you have 70% to 90% of your current income saved for retirement. Most employees have IRA accounts and savings put aside for their retirement, but most of the income is likely to come from social security. If you take your fund from social security at your full retirement age, you are likely to get about 40% of your income. The rest of the income required can come from your well-maintained 401(k). However, you need to ensure that your 401(k) account is purely used for retirement only. Try to avoid withdrawing small amounts from your 401(k) plan as it can create an imbalance in your financial health at retirement.
Importance of a 401(k) Plan
- 1. Matching Contributions
If your employer offers a matching contribution to your 401(k) plan, that’s easy and free money. Some employers offer 50% of your first 6% contribution towards your 401(k) plan. For example, let’s assume that you earn $50,000.Your contribution is 6% of your income = $3,000
If your employer offers dollar-to-dollar match = $3,000
If your employer contributes 50% of your 6% = $1500
Moreover, your employer’s contribution to your 401(k) plan doesn’t count towards your annual contribution limit. Hence, you have all the money to gain and nothing to lose.
2. Lifetime Contributions
Once you turn 70 1/2 years of age, you can no longer make a contribution towards any of your retirement accounts, including traditional IRAs even if you are still working. April after you turn 70 1/2, you have to start withdrawing small amounts, which are called Required Minimum Distributions (RMDs) from your retirement accounts.
As soon as you start taking RMDs, it is considered normal income and could propel you to higher tax rates. A 401(k) plan works differently v.s. an ira. As long as you are still working, you can contribute to a 401(k) plan and as long as you own less than 5% of the business that employs you, you are not required to take RMDs from your employer.
3. Protection from Creditors
A 401(k) plan is an ERISA-qualified retirement account. This means that it is set up under the Employee Retirement Income Security Act. Therefore, a 401(k) plan provides creditor protection.
Having a 401(k) plan also offers some protection from federal tax liens too. Since 401(k) legally belongs to your employer, IRS cannot place a lien on your account.
4. Roth 401(k) Option
Since 2006 when the rules were changed, 401 k participants have the option to contribute traditional (before tax) dollars or Roth (after tax) dollars or any combination thereof. In addition, the plan participant has the power to a Roth conversion inside the plan. In either case the Traditional dollars and the Roth dollars will be in separate sub accounts all within the same plan.
By using Roth contributions and/or Roth conversions there are tax advantages to the participants. With a Roth contribution, your contributions are taxable at today’s tax rate, BUT your withdrawals in retirement are completely tax-free. This plan works best for people who would be in a higher tax bracket in their retirement. Roth 401(k) contribution limit is similar to a traditional 401(k) plan.
||Up to $19,000 (for 50 years and above catch-up contribution limit is of $6,000)
Traditional and/or Roth IRAs have income limits. You are allowed able to make a contribution towards a Roth IRA if your income is below a certain amount.
However, there are no income limitations affecting 401 k contributions. If you fall in the bracket of high earners, Roth 401(k) is the ideal retirement plan for you. This a huge difference between IRA’s and allows high income people to enter the Roth world. It is the best of both worlds, no income limitations and much higher contribution limits.
4. Backup Retirement Plan
Even if you have a lot of retirement savings plans to finance your retirement, it is advisable to have a 401(k) plan as a backup plan. From now until your retirement, a lot of things can happen. You may lose your job, you may go out of business or your health could make it impossible for you to work. These scenarios can adversely affect your quality of life in retirement. To make sure that you have a good life post your retirement, putting away some portion of your income into a 401(k) plan makes sense. With a well-financed 401(k) account, you are prepared to face the challenges of a retired life without compromising on the standard of your living.
Why Your 401(k) Matters – Final Words
If you want to sustain the lifestyle you have outlined for yourself in your retirement, you need to save aggressively. A 401(k) is a more efficient tool to save for retirement than a traditional IRA. Whether it is an individual retirement account or an employer-sponsored saving plan, the key to having a good retirement saving plan is to save consistently. Create a budget, calculate the percentage of salary you should be putting aside for retirement each month and stick to your budget.