Most people look forward to retirement. For some, it will be a time to travel and spend time with family members. For others, it will be a time to start a new business or begin a charitable endeavor. Regardless of what approach you intend to take, you will need retirement income to support your lifestyle. Many people depend on multiple sources of retirement income. Here's a quick review of the six primary income sources:
Social Security
Social Security is the government-administered retirement income program. Workers become eligible after paying Social Security taxes for ten years. Benefits are based on each worker's 35 highest earning years. If there are fewer than 35 years of earnings, non-earning years are averaged in as zero. In 2017, the average monthly benefit is estimated at $1,360.
Individual Retirement Accounts
Traditional IRAs have been around since 1974.
- A benefit of a traditional IRA is that contributions can be partially or fully tax deductible.
- Distributions from a traditional IRA are taxed as ordinary income.
- Any distribution taken before age 591/2 may be subject to a 10% federal income tax penalty.
- Required minimum distributions start once you reach age 701/2.
Roth IRAs were created more recently in 1997.
- They have an income ceiling on contributions, which makes them unavailable to taxpayers with high incomes.
- Tax-free and penalty-free withdrawal of earnings must meet a five-year holding requirement and occur after age 591/2.
- Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner's death.
- The original Roth IRA owner is not required to make minimum annual withdrawals.
Defined Contribution Plans
Well over one-third of workers are eligible to participate in a defined–contribution plan such as a 401(k), 403(b), or 457 plan. Eligible employees can set aside a portion of their pre-tax income into an account, which then accumulates tax deferred.
Distributions from defined contribution plans are taxed as ordinary income and, if taken before age 591/2, may be subject to a federal income tax penalty. Generally, once you reach age 701/2, you must begin taking required minimum distributions.
Defined Benefit Plans
Defined benefit plans are "traditional" pensions—employer–sponsored plans under which benefits, rather than contributions, are set. Benefits are typically based on factors such as salary history and duration of employment. The number of traditional pension plans has dropped dramatically during the past 30 years.
Personal Savings and Investments
One survey found that nearly 70% of today's workers expected that their personal savings and investments outside their IRAs and employer-sponsored retirement plans would be either a primary or minor source of retirement funds. The same survey found that only 61% of current retirees report personal savings and investments are an actual source of income.
Continued Employment
In a recent survey, 79% of workers stated that they intended to keep working in retirement. In contrast, only 29% of retirees reported that continued employment was, in fact, a source of income.
Source: Employee Benefits Research Institute
Charles P Myrick CPA offers tax preparation for individuals using a process that combines smart, personalized planning with annual tax preparation and filing. Our job is to help you know about all the available tax opportunities that meet your individual needs and circumstances. We work closely with tax lawyers, and investment advisors to ensure that all the details are legally sound, technically accurate, and working to your maximum benefit. Contact us to learn more: (202) 789-8898