Saving for retirement – overview and options.

Now that 2014 tax season is almost over, I started reflecting about what we’ve seen as we’ve processed literally thousands of 2013 tax return documents. As CPAs, we have the unique opportunity to view our clients’ general financial health as we work through the documentation necessary to file tax returns. I already wrote about the fact that the average client seemed to pay more taxes this year, but I also noticed another alarming trend. We’re not saving enough.

Your money needs to live longer than you do

To make things worse (not really), we are also living longer. Based on a recent CDC study, we’re adding another 0.1 year to our lifespan each year. That means our retirement money needs to last longer, so we need to save more and start saving earlier. It’s never too late.

There are many retirement savings options, but I thought it would be helpful to see the more common ones summarized in one article. Please note that this is just a general overview, not a full explanation of each option. Meeting with a CPA or financial advisor is an important step in making the best retirement decisions for you and your family, but hopefully this will help explain some of the most common options available today.

Most common retirement plan options offered to employees of small to large businesses:

• 401K. The 401K is the most common business retirement program. You can save up to $17,500 ($23,500 if you’re 50+), or up to $52,000 with employer contributions, typically 2.4%. Your contributions can be made before or after taxes, and earnings are tax-deferred.
• Profit sharing. These plans promote retirement security along with business success. Employers determine annual contributions, and participants receive their share based on compensation, length of employment, or other formula.

Four retirement plan options available to the self-employed, sole proprietors, and business partners:

• SEP IRA. With a Simplified Employee Pension IRA (SEP), a business owner can determine how much to contribute each year. That may be $0 up to 25% of each participant’s compensation ($52,000 maximum).
• SIMPLE IRA. The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows you to contribute up to 100% of your earnings, but only up to $12,000. Your business may also contribute from 1-3%. Early withdrawal penalties are 25% vs. the typical 10%.
• Individual 401K. Also known as a Solo 401K, this is like a 401K for sole proprietors or business partners with no employees. As a business owner, you can contribute as an employee and owner, and often much more than a SEP or SIMPLE IRA, up to $17,500, or $23,000 for those 50+.

Three retirement plan options are offered directly to consumers like us:

• IRA. Anyone under 70 ½ years old can contribute to a traditional IRA. Contributions are deductible now, and withdrawals in retirement are taxed as ordinary income. If you think that your tax rate will be lower in retirement, this may be the best individual option for you.
• Roth IRA. Named after Senator William Roth, this IRA is available to those whose income falls under a certain limit as determined by the IRS. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are normally tax-free. Invest in this if you think your tax rates will be going up.
• myRA. President Obama announced this no-risk US government backed program earlier this year, offering a retirement savings option to those without access to an employer provided plan. When the program launches, participants will be able to invest as little as $25, but the return will be minimal.

Your results may vary….

As I mentioned above, the rules behind each of these options, as well as the details for calculating contribution maximums, can be pretty complex. The IRS website offers some assistance, but you may need to plow through a lot of information to get your questions answered. Contact the CPAs at Bach, James, Mansour & Company to help you evaluate your specific needs and find the best option(s) for you and your family.

Neal Bach, CPA