Retirement Planning is important for working toward meeting your future financial goals. Keeping your eye on your Retirement Plan at work is important to ensure the firm who manages your money is following the strict rules in retirement accounts. Knowing and understanding these rules is needed when monitoring your retirement benefits. Using a Financial Planner who knows the rules and guidelines for these plans can make this responsibility easier on you. A Financial Planner can help you establish where exactly your responsibility lies and they can guide you to the most effective and profitable solutions.
Because there are various types of Retirement Plans, your Financial Planner needs the knowledge to review your current Retirement Plan and life situation so they can help you devise a plan to work toward financial freedom in your retirement. This review will include (as applicable) your current Employer's Defined Contribution Plan [401(k)].
If you don't have a 401(k), your Financial Planner can help you figure out when you are eligible to enroll in your employer's plan and will help you understand the following:
- When you can enroll and start accruing benefits
- What your paycheck deduction will be
- What your employer matches
- When and how you earn your benefits
- What to do when you want to makes changes to your plan
- What to do with your benefits if you were to ever leave your employer
There are other ways to save for retirement if you are self-employed or your company does not have a 401(k) plan. These plans will be discussed with your Financial Planner to find the best plan for you and your future goals.
Retirement Plans-401 (k), IRA and ROTH IRA
Why invest in a 401(k) or an IRA? The money you deposit into these accounts is pretax and will be taxable once you withdraw the money when you retire. Since your tax bracket may be lower then, you may save money by getting a tax break. Thus, you are not only saving money for when you retire, you may save more by contributing to a 401(k) or an IRA versus just saving money in a savings account or a closet shoe box.
There are two popular types of retirement plans: 401(k) and IRAs. Your Financial Planner can help you decide which one to invest in and if you have a 401(k) and an IRA and how much to invest in each. Because there are several types of each, they can help you decide which one is available to you and which one will be appropriate for you. A 401(k) plan is an employer plan where the employer typically matches a certain amount of money that you put into your plan. This match contribution varies in amount depending on the employer's preference. However, the IRS has a maximum contribution that you can personally make to your 401(k). This maximum can change yearly so ask your Financial Planner for the most current maximum contribution.
IRAs are for individuals to save up for retirement. You can have both a 401(k) and an IRA and if you were to leave your employer for any reason, you can rollover your benefits to an IRA account. Again, your Financial Planner can help you with your rollover and what kind of IRA account you should enroll in; traditional IRA or Roth IRA.
Business owners ask me all the time should I contribute to an Individual Retirement Account (IRA) or start a retirement plan. The answer is always the same. It depends. Both offer the opportunity to save on a pre-tax basis, that is the money you contribute lowers your taxable income, and require you to have earned income but that is where the similarities end. Since the IRA and the 401(K) plan are the most popular vehicles we will compare the two. In 2011 an individual can save $5,000 into an IRA and an additional $1,000 if you are older than 50 which is called a catch up contribution. The 401(K) offers the opportunity to save a base $16,500 but can be spiced up with a safe-harbor plan and profit sharing component allowing you to save up to 25% of your compensation. For example, if you made $220,000 last year and participated in a safe harbor 401(K) Profit sharing plan you could save $45,000 pre-tax. So the question that springs to mind is "how much do you want to save?"
If it is $5,000 to $6,000 then the IRA may be right for you. If you're looking to save some money in taxes and put away a little bit more it looks like the retirement plan, 401(K), is what you're looking for. We are not tax experts but we will work hand in hand with your tax advisor to select the plan that is best for you.
Now these are just a few examples of retirement plans. If you'd like to save some money on taxes and plan for your future then give me a call and we can discuss your options at (707) 444-9212.