Now that tax time is finished, thinking about putting money away for use later in life is not. Retirement planning and saving is a 365/24 deal... it should always be on your mind.
My day involves lots of planning to accomplish many different goals. Financial planning involves budgeting, investment management, cash flow, portfolio construction and other items pertinent to the particular situation. Estate Planning is a bit different, involving our legal team to design a plan to deal with the wealth of the client during their life and after death, and providing advice to design a program to accomplish the client's wishes in both stages. Retirement planning starts with the first job you get, not later in life when you think you are ready to start thinking about the golden years: each year counts as you can't go backward to save retroactively. Saving for retirement takes structure and advance planning, having an idea as to what you would like your life to look like when you call it quits which admittedly is an evolving issue. The plan will change as you mature and get to know and experience more of the world and age... the saving though is important regardless of the eventual goal. Then, at the time of retirement is when withdrawal planning comes into fruition. Not familiar with the term or the action? No problem... let's take a look- this plan takes decades to formulate.
Many of us are familiar with one of the most often used savings vehicle, the 401(k) utilized with for profit companies, and the 403(b), utilized for non-profit organizations. Essentially the same, different IRS code. Many employers match your contribution, up to a point depending on the company and their plan. Self-employed business entrepreneurs may utilize a 401(k) for their company, as well as a Simple IRA which expands the level of contributions from $5500 for an IRA to $15,500*- with expanded limits if you're over 50. Still for entrepreneurs is a SEP plan, which allows for larger contributions yet- up to 25% of income with a cap of $45,000. The old pension plans of our youth are for the most part gone, formerly known as Keogh, Defined Contribution or Defined Contribution plans. Then, there's the good ole' Traditional IRA, base maximum contribution of $5500 if you're under 50, more if you're over 50 (and utilized by most Americans today to put away money for retirement. (This is the time where Compliance has me say "not all plans are fit for everybody, this commentary does not include all rules and regulations for each plan, consult with your CPA or tax advisor before investing or starting a plan... there, I've made them happy!) But I digress... the above are some commonly utilized plans (and there are more) for putting money away for retirement. The commonality with all the above plans, Social Security, and most vehicles to create income in retirement are that they are mostly taxable when you utilize withdrawals which may or will reduce your net income. WHAT'S A PERSON TO DO?
Welcome to the Roth IRA. While most of you know the contributions are made with after tax money as opposed to the above with before tax money, have you thought about the effect of your retirement with regard to taxation. By utilizing the Roth, all growth of the IRA is tax free, as well as the withdrawals in your golden years. Depending on your income (again, check with your tax advisor) you may be able to contribute to a Roth IRA as well as your current plan. The key here, is that the withdrawals from your Roth many years from now are tax free, leaving more net income in your pocket, as opposed to all the before tax plans. Thus, you control how much of your retirement money will be paid to Uncle Sam and not retained by you in your golden years- when you need the most you can get. In retirement, as the old Smith Barney commercial by the late, great John Houseman used to say... ”It's not what you earn, but what you keep.” That's withdrawal planning. That John, he was a smart man. See you on the tee...