You Can't Finance - But You Can Save For - Your Retirement
By Beverly DeVeny, Chief IRA Analyst
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Are you a 20- or 30-something year old or do you know any of those individuals? You’ve now paid your taxes for 2015, take a deep breath, and start planning for your retirement. You will most likely have no pension other than Social Security, if it is still around. Social Security will not cover all of your living expenses just as Medicare will not cover all of your medical expenses. You need to start saving and planning for your retirement NOW. Trust me – 40 years will go by very, very quickly.
If your employer offers a retirement plan, make sure you participate - especially if there is an employer match. You should consider the employer match as part of your salary. Would you toss 3% or 6% of your salary every pay period into the trash? Of course not! But that is what you are doing if you are not deferring enough to your employer plan to collect the match. So sign up now!
Make IRA contributions. Even if you are participating in an employer plan, you can still make IRA or Roth IRA contributions. Depending on your income, tax filing status, and which partner participates in the employer plan, you may not be able to deduct your IRA contribution, but you can still make one. Remember, this is for your retirement. There is no way to finance your retirement other than through Social Security and what you save. You can finance a home, a car, education, but you cannot finance your retirement.
Contributing to employer plans and IRAs is a great place to start. But don’t lose sight of the fact that those accounts are tax deferred. What that means is you don’t have to include those contributions in your taxable income as you earn those funds today. But, you will have to pay ordinary income tax on those funds when you take them out, which will hopefully not be until you are retired. There are required distributions that begin in the year you turn age 70 ½.
Wouldn’t it be nice if you could take distributions from a retirement account that are tax free? You can! Instead of putting funds into an IRA each year, if your income is below certain limits, you could put those funds into a Roth IRA. You would get no tax deduction now, but when you withdraw those funds later in life, hopefully after you have retired, you get them back tax free. And, all the money those funds have earned will also be tax free.
As you change jobs during the course of your working career, make sure that you don’t take your company plan funds and spend them. You can move them into your new company plan, if the plan allows that, you can move them to an IRA and keep them tax deferred, or you can convert them to a Roth IRA. You will pay tax on the amount that goes to the Roth IRA, but you have now increased your tax-free retirement savings. This can be especially powerful for younger workers as their account balances will generally be smaller and their tax rate will be lower.
As the saying goes – “Pay yourself first.” Make sure you are saving for your retirement. It is the one part of our lives that cannot be financed.
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