DALLAS – In the past, companies supplied retirement funds for their employees through defined-benefit pension plans that paid a set amount to retirees.
Today, those plans are rare and employers are increasingly shifting the responsibility for retirement savings to the employee. That means that workers must take an active role in planning – and saving – for their retirement.
The good news is that there are many tax-advantaged options that can enhance the growth and earnings power of your retirement nest egg, according to the Texas Society of CPAs.
Company-sponsored 401(k) plans offer tax advantages and an easy way to automatically accumulate retirement money, so they’re well worth investigating. In a 401(k), you choose a percentage of your salary, up to an annual limit, that is set aside in an investment retirement account.
Employees over age 49 may make additional catch-up contributions. You save money on the contribution because it is not taxed in the year you earn it. In addition, you don’t have to pay taxes on the earnings on your money until distributions are made – a time when you’ll likely be in a lower income tax bracket. Distributions made before age 59 generally also are subject to a 10 percent penalty for premature withdrawals.
Not all 401(k) plans are alike, however, so you should examine your investment options under the plan. Look for a reputable investment manager and fund choices that enable you to pick an investment that meets your risk tolerance and investment goals. And monitor the plan’s performance to see if it’s time to move into a different investment.
Take advantage of employer matching
Many employers will deposit a certain amount to your retirement plan based on your own contributions. For example, a company might match 50 percent of your contribution up to 6 percent of your salary deferral. The company match essentially amounts to a tax-free bonus, so it’s well worth contributing enough to your account to qualify for the match.
Open an individual retirement account
401(k) accounts are great investments because of the employer match and because the maximum contributions are typically higher than those of IRAs. However, if your employer does not provide for a 401(k), you should consider opening an individual retirement account. There are two basic choices:
With a traditional IRA, your contributions are tax deductible provided you receive compensation that is includable in income and are not age 70? or older during the tax year. Amounts earned are not taxed until distributions are made.
In a Roth IRA, the contribution itself is never deductible. However, the earnings and price appreciation generally are free from income tax when money is withdrawn from the account.
Your choice of an IRA will depend on your financial situation and what you expect your tax burden to be when you retire. No matter which you select, remember to consider a spousal IRA if you are married and filing a joint return. Even if only one spouse is employed, the other spouse is generally allowed to make an IRA contribution as well, which is a great opportunity to expand your family’s tax-deferred retirement savings. If you are unsure of the best retirement options, be sure to turn to your CPA with questions on retirement and any other important financial issues facing your family.
Personal finance information
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TSCPA (www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 28,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.