What You Should Know About Your Retirement Plan

When I talk with clients about financial planning I include the importance of a durable approach to retirement. My message? Whether you are starting your career or have been at it for a while, you should be taking advantage of the retirement plans that are available.

Since traditional pensions are becoming a thing of the past, most workers build retirement accounts from a combination of employer sponsored and individual plans. There are two primary retirement plan types — 401(k)s and IRAs — and your challenge is to know how to choose the right plan for you.

401(k) Retirement Plans

For-profit companies can sponsor 401(k) plans, meaning they can offer them to their employees. Nonprofits and state and local governments can sponsor similar retirement plans, known as 403(b) plans and 457(b) plans, respectively.

Employer matching funds: Many employers will match a portion of the money you contribute, or add, to your 401(k). In other words, they will put some company money in your 401(k) if you put some of your paychecks in it. For example, an employer might match every dollar you contribute, up to an amount equal to 3 percent of your income.

Employer matches make 401(k)s the ideal place to save money for retirement. If your employer offers a match, contribute whatever it takes to pick up the maximum match. Otherwise, you’re leaving free retirement money on the table.

Contribution Limits

In 2019 you can contribute:

Up to $19,000 to regular 401(k) plans. If you are 50 or older, you can also contribute an additional $6,000 as a “catch-up” contribution.

Once the money is placed in a 401(k), it generally cannot be withdrawn until you reach age 59^1/2 without having to pay a penalty.

IRA Retirement Plans

An IRA – individual retirement account - works like a 401(k) in that you are investing money and letting it grow until retirement. Again, you generally can’t withdraw money without penalty until age 59^1/2.

Your employer does not need to sponsor an IRA for you to take advantage of one, though. You can set up an IRA on your own.

Contribution Limits:

For 2019, you can contribute up to $6,000 to IRAs. If you’re 50 or older, you can contribute an additional $1,000 to “catch-up.”

These contribution limits apply regardless of how many IRAs you have. So if you’re 45 and have two IRAs, you could put $3,000 in one and $2,500 in the other.

Roth or Traditional IRA

There are two types of IRAs: traditional and Roth. One fundamental difference between Roth and traditional plans is how contributions are taxed.

Pre-tax income is invested in traditional accounts. This advantage of traditional accounts means that when you contribute money, you can lower your tax bill by using the contribution as a tax deduction. On the other hand, you pay taxes on the money later when you withdraw it.
After-tax income is invested in Roth accounts. There is no tax deduction for your contribution to a Roth account. But your withdrawals later in retirement are not taxed. So by skipping the tax break during your working years, you get tax-free money when you take it out.

Your Tax Advisor Can Help

There are many variables to consider when choosing your retirement plan options. A smart strategy is to consult your CPA or financial advisor. The professional will look over your income and the projected tax rates to determine which option would benefit you.

Let us help you plan ahead for growth!

Charles

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