Retirement Planning

The simplest answer? As soon as possible. Most people can agree that, while it may not be completely non-existent in a few years, social security likely will not be what it is today, and you will not be able to rely on the income from that alone.

Whether you're 25 or 45 you likely think that you have plenty of time to worry about your retirement. The truth is though, you are only ever getting closer to your retirement day. The earlier you start saving, the longer you have to put money aside for retirement, and to allow that money to grow.

There's no need to panic if you haven't started saving for your retirement. It is never too late to start because some is always better than none! Two of the most common retirement accounts that you can utilize to save for retirement are 401(k)s and IRAs (both Traditional and Roth).

A 401(k) is an employer-sponsored retirement plan that offers tax benefits while saving for your future. Those who contribute to their Traditional 401(k) typically do so through pre-tax withholdings from their paycheck. Many companies are now offering Roth 401(k)s. With a Roth, contributions are made post-tax withholding from your pay, BUT, when you withdraw the funds in retirement, your withdrawals are tax free!

Employers must offer a match on your 401(k) contributions, meaning that what you contribute to your 401(k), they will also contribute, up to a certain amount. Take advantage of this match because it's literally free money! And who doesn't love free money?

401(k)s have an annual contribution limit but it is much higher than IRA contribution limits. With the higher contribution limits and employer matching funds, 401(k)s are a great way to save!

Some employers do not offer a 401(k) plan, but don't be discouraged. You may be able to take advantage of other retirement accounts, such as a Roth or Traditional IRA.

An individual retirement account, or IRA, is an account that allows you to personally save for your retirement. There are two main types of IRAs: Traditional and Roth.

Traditional IRA
A Traditional IRA allows you to save money for retirement while getting an immediate tax break. With a Traditional IRA, you do not pay taxes on the funds until you withdraw from the account. When you take withdrawals from a Traditional IRA, the money is taxed as though it were just your normal income.

Unlike a 401(k), a Traditional IRA is typically not provided by an employer. As long as you have earned compensation, or file jointly on a tax return with someone who earns compensation, you may own and contribute to an IRA. Contributions to your IRA are also on a voluntary basis and can be made at any point during the year. You can continue to make contributions to your Traditional IRA for the previous tax year until the tax filing deadline.

While it is never encouraged to withdraw from a retirement plan for reasons other than retirement, it's understandable that some circumstances may have you wanting to withdraw from your Traditional IRA early. Withdrawing from a Traditional IRA may result in early withdrawal penalties if you are under the age of 59 1/2. Ultimately the tax consequence of the withdrawal falls to the owner although there are some early withdrawal penalty exceptions. It is best to consult a qualified tax advisor to see if they will qualify. Owners of a Traditional IRA are required to take their first required minimum distribution in the year that they turn 73. The required minimum distribution is the amount set by the IRS depending on the balance in the IRA.

Roth IRA
A Roth IRA is an account that allows you to save money for retirement with after-tax contributions. This means that the funds contributed to a Roth IRA have already been taxed so when you make a qualified withdrawal on your earnings, it is tax free. To be considered a qualified withdrawal, two criteria must be met. You are over the age of 59 1/2 and it has been 5 years since your first contributions to any Roth account.

Contributions and earnings on Roth accounts grow tax-free, and Roth IRAs do not have a required minimum distribution since the taxes have already been paid. Roth IRAs have an income limit for making contributions. Contact a qualified IRA Specialist or tax advisor with questions on this. Contributions to your Roth IRA can be done at any time during the year, and as long as you haven't met your contribution limit, you can continue to contribute for the previous tax year until the tax filing deadline. Similar to a Traditional IRA, you have to have earned income in order to contribute. Earned income for contributions is defined as wages, salaries, professional fees, or other amounts received for professional services.

Tax free growth, tax-free withdrawals, and no required minimum distributions make these a great option for many people.

You may be wondering just how much you need to save to have a good retirement nest egg. Most experts suggest that you have enough of a savings to supplement 70% to 90% of your income before you retired. This usually breaks down to setting aside roughly 10% to 15% of your income each year. The longer you wait to start growing your retirement, the more money you should put aside each year. It's a good idea to use a retirement calculator to come up with an estimate as to how much you should be saving.