How
can you save for retirement even if you don't have a 401(k) plan?
A
company’s 401(k) plan is a great savings tool. An employer’s 401(k) plan that
offers a match can jumpstart your savings. Having a savings plan at work makes
it easier to stay committed to saving money on a regular basis. Hopefully, your
employer has done the due diligence necessary and has chosen an optimal mix of
investments at a reasonable fee structure.
If
you do not have a 401(k) plan at work or you are self-employed, you can still
save money for your retirement. I recommend a 15% savings goal. You can start
with incremental goals. If you are saving nothing, I recommend saving 5%. If
you are already saving 5%, I recommend that you increase it to 10%. If you are
saving 10% that is great and perhaps you can increase it to 15%. Reviewing cash
flow and budgeting helps identify where the funds are that can possibly be
redirected to savings.
Once
you decide on the monetary amount you want to save on a regular basis, the next
decision is where to put the money. If you do not have a 401(k) at work and are
self-employed, you have a range of retirement plan options to choose from. You
can consider the SEP IRA, the Profit Sharing Plan, the Money Purchase Plan, the
Simple IRA, the Defined Benefit Plan or the 401(k). All have their own pros and
cons to consider. You can check out the IRS Publication 560 for more
information on these plans.
If
you do not have a 401(k) plan at work and are not self-employed, you can
consider the following options:
·
Fund the IRA of your choice; Traditional IRA or
Nondeductible IRA. If you are not covered by a retirement plan, you can
fund a Traditional IRA up to $5,500 per year or $6,500 if you are over age 50. If you are covered by a retirement plan
and your income is below the income guidelines, you can still contribute to the
Traditional IRA. For the 2017 tax year, below are the
adjusted gross income (AGI) limits to take a Traditional IRA deduction if you are
covered by an employer's retirement plan. If your AGI is less than the lower
end of the range, you are entitled to a full deduction of your Traditional IRA
contributions. If your AGI is above the higher limit, you cannot deduct any Traditional
IRA contributions. Finally, if your AGI falls within the range, you are allowed
a partial deduction. If your income is over these amounts and you are covered
by an employer's retirement plan, you can still contribute to a Nondeductible
IRA instead.
|
Tax
Filing Status
|
2016 Tax
Year
|
2017 Tax
Year
|
|
Single or
Head of Household
|
$61,000-$71,000
|
$62,000-$72,000
|
|
Married
Filing Jointly
|
$98,000-$118,000
|
$99,000-$119,000
|
|
Married
Filing Separately
|
$0-$10,000
|
$0-$10,000
|
·
Fund a Roth IRA. Not
everyone is allowed to directly contribute to a Roth IRA. In order to make a
contribution, your AGI must be below a certain threshold that depends on your
filing status.
|
Tax
Filing Status
|
2016 Tax
Year
|
2017 Tax
Year
|
|
Single
|
$117,000-$132,000
|
$118,000-$133,000
|
|
Married
Filing Jointly
|
$184,000-$194,000
|
$186,000-$196,000
|
|
Married
Filing Separately
|
$0-$10,000
|
$0-$10,000
|
·
Consider using a
Variable Annuity. Variable Annuities
offer similar benefits to a Nondeductible IRA but usually limit the investment
choices offered. Also, some Variable
Annuities have very high expense and surrender charges so be sure to take that
under consideration.
- If you have a
home with a 30 year mortgage, consider converting it to a 15 year
mortgage. Not only will you pay off your loan faster but you will
also qualify for a lower interest rate. Typically, a 15 year mortgage is
15% to 20% more than a 30 year mortgage. This is not because it is a bad
deal. Instead it is because you are paying off more principal
each month. It is truly amazing to see how much interest you will save
overtime by paying the loan off in 15 years instead of 30 years. If you
can't afford to go for a 15 year mortgage then consider paying one extra
payment per year. On a 30 year mortgage, this can
save you six to seven years of payments. If you can't afford to do that,
consider rounding up your payment by an extra $100 a month. Paying down extra principal is another form of
saving. By paying off the loan faster, you are paying substantially less
interest.
- Consider funding
a brokerage account made up of stock index funds and municipal bond funds.
This is a very tax efficient way to invest and you have liquidity on the
money. You can sell the investments at any time if you need the money.
If you have additional questions, please
feel free to call my office at 201-843-0044 or check out our website at www.wattersfinancial.com for additional
information concerning Financial Planning and Wealth Management topics.
Timothy Watters, CFP®
