How can you save for retirement even if you don't have a 401(k) plan?
Submitted by Watters Financial Services, LLC on May 2nd, 2017How 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 arecovered 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.
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Tax Filing Status
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2016 Tax Year
|
2017 Tax Year
|
|---|---|---|
|
Single or Head of Household
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$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 offmore 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®
