Saving for Retirement

Many Americans are taking advantage of the Roth IRA, with its $5,500 annual contribution limit ($6,500 for those 50 or older), to sock away money for retirement and enjoy nontaxable growth on the invested funds. While Roth IRAs, unlike traditional IRAs, do not afford taxpayers a deduction from taxable income for the contribution. However, unlike traditional IRAs, on which withdrawals at age 59 ½ are taxed as ordinary income, Roth IRAs allow tax-free withdrawals, which can be deferred as long as the owner wants (another difference from traditional IRAs, which require withdrawals to begin by age 70 ½).

But suppose you’ve already made your maximum contribution to your Roth IRA for the year. First of all, congratulations on having the foresight to fund your retirement account to the highest level possible! But what if you want or need to save more? Are there vehicles you can use that offer tax advantages, either now, during the accumulation period, or when the funds are withdrawn in retirement?

The answer is yes; there are a number of plans and tax-deferment savings methods that many investors are eligible for. If you’ve already reached the annual limit for your contribution to your Roth IRA, consider some of the following options that may be available to you:

  • 401(k), 403(b), or 457 plans: Your employer may offer a 401(k) plan, which is a defined contribution plan that allows you to contribute on a payroll deduction, using either pre-tax or after-tax income, depending on the specific options in the plan. A 403(b) plan works in a similar way but is only available to employees of qualified, nontaxable institutions like public school systems, universities, and some religious organizations. Both 401(k) and 403(b) plans usually allow the individual employee to select the investments within the individual account, typically from a list of available options provided by the plan. You can contribute as much as $18,000 to a 401(k) or a 403(b) in 2017 (or $24,000 for those 50 or older). A 457 plan, which is a deferred compensation plan available to governmental and certain other employers, allows contribution of pre-tax income, which can grow on a tax-free basis until money is taken from the plan, when it is taxed as ordinary income.
  • SIMPLE IRA or SEP IRA for self-employed individuals: If you have self-employment income or a small business, you may be able to contribute up to $12,500 annually ($15,500 if you are 50 or older) to a SIMPLE (Savings Investment Match Plan for Employees) IRA. Once again, contributions to SIMPLE IRAs are deducted from taxable income, the plan grows tax-free until retirement, and withdrawals are taxed as ordinary income. The SEP (Simplified Employee Pension plan) IRA also grows tax-free until retirement and is taxed as ordinary income but the contribution cannot exceed the lesser of 25% of the employee’s compensation or $54,000.
  • Defined benefit plan: These plans are more complicated to set up and administer, but for a self-employed individual with high income who is nearing retirement, a defined benefit plan can allow you to contribute and defer taxes on up to $210,000 per year.

Of course, the most important retirement savings plan is the one you have! Even if you aren’t contributing the maximum each year, you can still make significant strides toward a financially comfortable retirement by making systematic contributions each year, and by carefully choosing your investment options. A qualified and experienced financial advisor can help you sort out the options that are best for you.

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