Tax-Smart Retirement Planning
In the past, companies supplied retirement funds for their employees
through defined-benefit pension plans that paid a set amount to retirees.
Today, those plans are rare, and employers are increasingly shifting the
responsibility for retirement savings to the employee. That means that
workers must take an active role in planning–and saving–for their
retirement. The good news is that there are many tax-advantaged options that
can enhance the growth and earnings power of your retirement nest egg,
according to the Iowa Society of CPAs.
Don’t overlook the 401(k)
Company-sponsored 401(k) plans offer tax advantages and an easy way to
automatically accumulate retirement money, so they’re well worth
investigating. In a 401(k), you choose a percentage of your salary, up to an
annual limit, that is set aside in an investment retirement account.
Employees over age 49 may make additional catch-up contributions. You save
money on the contribution because it is not taxed in the year you earn it.
In addition, you don’t have to pay taxes on the earnings on your money until
distributions are made–a time when you’ll likely be in a lower income tax
bracket. Distributions made before age 59½ generally also are subject to a
10% penalty for premature withdrawals.
Choose wisely
Not all 401(k) plans are alike, however, so you should examine your
investment options under the plan. Look for a reputable investment manager
and fund choices that enable you to pick an investment that meets your risk
tolerance and investment goals. And monitor the plan’s performance to see if
it’s time to move into a different investment.
Take advantage of employer matching
Many employers will deposit a certain amount to your retirement plan based
on your own contributions. For example, a company might match 50% of your
contribution up to 6% of your salary deferral. The company match essentially
amounts to a tax-free bonus, so it’s well worth contributing enough to your
account to qualify for the match.
Open an individual retirement account
401(k) accounts are great investments because of the employer match and
because the maximum contributions are typically higher than those of IRAs.
However, if your employer does not provide for a 401(k), you should consider
opening an individual retirement account. There are two basic choices:
- With a traditional IRA your contributions are tax deductible,
provided you receive compensation that is includable in income and are
not age 70½ or older during the tax year. Amounts earned are not taxed
until distributions are made.
- In a Roth IRA, the contribution itself is never deductible. However,
the earnings and price appreciation generally are free from income tax
when money is withdrawn from the account.
- Your choice of an IRA will depend on your financial situation and
what you expect your tax
burden to be when you retire. No matter which you select, remember to
consider a spousal IRA if you are married and filing a joint return. Even if
only one spouse is employed, the other spouse is generally allowed to make
an IRA contribution as well, which is a great opportunity to expand your
family’s tax-deferred retirement savings.
If you are unsure of the best retirement options, be sure to turn to your
CPA with questions on retirement and any other important financial issues
facing your family.
Access “Find a CPA.”
