Have you set a goal for retirement? Do you hope to bail out early like at age 55? Maybe your idea of the perfect retirement would be to move someplace where you’ll never have to be cold again or somewhere you could fish or hunt to your heart’s content. We don’t want to discourage you but you may not ever be able retire.
A recent Wells Fargo study found that 37% of people don’t ever expect to retire, but instead will have to “work until I’m too sick or die.” These, most likely, are the people who have too little when it comes to savings or have too much debt to pay off. However, it’s possible you could beat the odds and retire before you get too sick or die … but only if you begin saving now while you’re still young.
Your options
When it comes to saving for retirement most of us have only two options – a 401(k) or an IRA. If your employer offers a 401(k) that would be your best first choice especially if your employer matches funds. We know of some employers that match as much as 6% of their employee’s salaries and that’s free money. If your employer does not offer a 401(k) or if you’re a contractor with no real employer then you should definitely begin funding an IRA or Individual Retirement Account. For that matter even if you have a 401(k) plan where you work you should also start an IRA as the two together would help you save even more money for retirement, which could get you there just that much faster.
Choose from all two
There are two types of IRAs. They are the traditional IRA and a Roth IRA. The contributions you make to a traditional IRA are pretax meaning that you won’t be required to pay income tax on whatever amount of money you deposit into your account. However, you will be taxed on the money when you begin withdrawing it, which you are required to do when you reach age 72 1/2.
A Roth IRA is almost the exact opposite. The money you deposit in it will be taxed but when you withdraw it will be tax-free – assuming you’ve had the account for five years or longer. There are other benefits to a Roth IRA including the fact that you can withdraw contributions whenever you like and they will be free of penalties or taxes. Plus, if there is money in your account when you die your heirs won’t be required to pay taxes on it. On the other hand, if you have a traditional IRA that inheritance would be taxable.
As you have read a Roth IRA does have some advantage but a traditional IRA also some comes with some nice benefits as explained in tis brief video.
Add as much as you can
If you are younger than 50 you could put as much as $5500 in a traditional IRA every year. You could put the same amount in a Roth or a combination of the two. The ceiling is $6500 if you are 50 years old or older as of the end of 2014.
How to double your savings
You might remember the old gum commercial about “double your pleasure, double your fun”. In the case of an IRA you could double your savings fun because both you and your spouse could have one of these accounts even if one of you stayed at home with the kids. This is due to the fact that Uncle Sam permits what’s called a spousal IRA. The way this works is that the stay-at-home spouse could put away up to $5500 using his her spouse’s pay. This means you between the two of you would legally be able to sock away $11,000.
Read the fine print
If your MAGI (modified adjusted gross income) was $60,000 or less in 2014 and you’re single and have a retirement plan at work you would still qualify for the full $5,500 IRA deduction. However, as your income increases above $60,000 the ability to deduct that much money gradually fades away. Roth IRAs have different limit on your income. To deposit even a partial amount to a Roth your modified adjusted gross income must be less than $129,000 if you’re single or if you’re married it must be less than $191,000.
Jumpstart your children’s retirement
Your kids can’t fund an IRA unless they earn money themselves. But they don’t have to fund their accounts with their own money. As an example of this, let’s suppose your 15-year-old son had a part-time job last year. You could fund his IRA up to $5500 or his total earnings whichever is less. In this case your best option would be a Roth IRA. This is because he’s probably in a low-income tax bracket and wouldn’t need the deduction offered by a traditional IRA. However, 50 years from now as he is nearing retirement a single contribution of $5500 if left alone will have increased to more than $160,000 – assuming a 7% annualized return.
Are you self-employed?
If you work for yourself it doesn’t make any difference whether you work full-time or are a freelancer on the side. You will qualify for a simplified employee pension plan or SEP–IRA. This can be much better than a traditional or Roth IRA because you could contribute up to as much as 25% of your qualified earnings to a maximum of $52,000 (as of last year). Plus, you could wait until October 15 to make a contribution for 2014 if you were to file for an extension on your income tax. This is also better than either of the other two types of IRAs as the final day you could make a deposit in either of them for 2014 is April 15 whether you file on that day or get an extension.
Get started saving this year
You don’t have to wait until April 15 of next year to make a contribution this year. In fact if you delay, this could mean you’re missing out on more than a year’s worth of tax-free compounding. So don’t get stuck standing at the gate. Start making contributions now. Your 55- or 65-year-old self will thank you.
