What’s the best Retirement Plan for the way people work now?
The world of work is changing. Gone are the days when you would join the workforce, stay with one employer for your whole career, and then receive a nice pension when you retired. Per the Bureau of Labor Statistics, the average worker averages more than eleven different jobs before age 48, and that number is projected to grow. Clearly, a new approach to retirement savings is necessary.
With people much more likely to have lots of different employment situations in their career, it is more important than ever that you have a plan in place to save for retirement, and that you start early. Here’s a primer on the options out there to help you set aside money for your future.
Any time you’re eligible to participate in an employer sponsored 401k plan is an opportunity not to be missed. These retirement savings plans have been around for years and can be a great way to sock away money for your retirement in a tax advantaged way. Many employers offer these plans in two options, tax savings today, or tax savings in the future.
Tax savings today is what you get with the “regular” 401k plan. With this option, every dollar you save in the plan is a dollar that you will not have to pay income tax on in the year you make the contribution. Those tax savings can make setting aside some money for your future much more affordable, especially when you’re just getting started saving. There’s no such thing as a free lunch when it comes to taxes, so the deal with this type of plan is that when you retire, you’ll owe income taxes on every dollar you take out of the plan.
That tax savings later option is a ROTH 401k plan. With this option, you will still have to pay income tax on every dollar that you set aside this year, but when you’re retired and you’re taking money out of the plan, you won’t owe any taxes on that income then. If you’re just getting started in your career and think that you might earn more, and be taxed in higher brackets later in life, this strategy might make a lot of sense. The ability to pay lower tax rates now, than you will in the future, could add up to some big tax savings!
Currently, individuals under 50 can set aside up to $18,000 per year in a 401k account If you’re over 50, you can make an additional “catch-up” contribution of another $6000 per year for a total of $24,000 per year.
The other nice benefit with 401k plans is that often, employers will offer some sort of match to incentivize you to save. In other words, they give you free money if you decide to save for retirement. Since this is something you should be doing anyway, I would never recommend that you pass up the opportunity for free money!
Even if you are working for yourself, the 401k can be a nice option. In the new “gig economy” it’s very possible there will be times when you’re operating as an independent contractor or “solo-preneur”. In that case, it’s possible to set up an individual 401k. This can be an attractive option if you’d like to save more than you could in and Individual Retirement Account. That’s because you can make contributions to the plan up to 100% of income or in combination as the employee, and as the employer up to a maximum of $54,000 per year.
The Individual Retirement Account or IRA is another great retirement savings option, and has a lot of similarities to 401k plans, but the big difference is that contribution levels may be lower than those available in 401k plans, or depending on your income, your ability to contribute could be limited.
Currently, if you are under 50 you can contribute $5500 per year to either a “regular” or ROTH IRA. If you are over 50, you can make an additional contribution of another $1000. Having said that, the ability to contribute to an IRA could be limited depending on how much money you make. The amounts vary depending on your tax filing status. You can find the limits for your situation on the IRS website.
If you are self-employed and would like to save even more, there is another IRA option that might want to consider. The SEP or Simplified Employee Pension IRA allows you to contribute up to 25% of compensation to a maximum of $54,000 per year. Depending on your income level, this may be a great option as the paperwork requirements can be a lot simpler that with a Solo 401k.
As you are moving through your career, and building your retirement portfolio, you may want some of both types of accounts. The ability to take advantage of a possible employer match and potentially higher contribution levels may make the 401k an attractive option, whenever that’s a possibility. If that’s not an option at your workplace, the ability to set money aside in an IRA may be the way to go.
While the prospect of accumulating ten different retirement plan accounts before you’re 50 doesn’t appeal, don’t worry! Many employers allow you to “roll” your old 401k account in to their plans, so you may be able to consolidate old plans with your current employer. As another option, you can always roll your old 401k plans over in to and Individual Retirement account.
Bottom line, it may not be as simple as the old days, when you would spend your whole life with one employer, but saving for retirement is just as important as always. Understanding and taking advantage of the options available to save for retirement as you move through multiple employers will be critical to saving enough.
Do you have questions about your retirement savings plans? I’m happy to help!