First, combine the funds that should come from your Social Security benefit, pension, IRA or a 401(k) plan, and your existing savings that can help fund your retirement. Then, determine a savings goal to provide the additional income needed for your after-tax retirement spending. Be sure to factor in inflation and a reasonable rate of return, taking into consideration today’s tough economic environment. Next, determine how to save and where to invest your savings.
Check to see whether your employer offers a 401(k), a 403(b), or some other type of voluntary contribution retirement plan. Take advantage of these plans, and contribute the maximum you can afford up to the annual limit, which for 2011 is $16,500 for taxpayers younger than 50, and $22,000 for taxpayers 50 and older. Contributions are made before taxes, so these should lower your gross income and reduce your current tax bite. If your employer matches a percentage of your contribution, this is free money for you.
If you have earned income (or receive alimony) and don’t have an employer plan, or if you can afford to set aside additional funds, you might consider a traditional IRA or a Roth IRA. Traditional IRA contributions may be tax deductible, depending on your income and whether you have an employer retirement plan. Roth IRAs are not tax deductible, but accrue earnings tax free. However, Roth IRA contribution eligibility can be complicated for higher income taxpayers. The IRA contribution limit for 2011 is $5,000 ($6,000, if age 50 and older). In some cases, a spouse can contribute to an IRA based on the other spouse’s earned income.
Self-employed individuals have a variety of defined contribution retirement plans available to them. The individual is allowed contributions nearing 20% of net income, limited to a maximum of $49,000 for 2011. There are also more complicated defined benefit plans available that allow substantially higher contributions.
You may consider acquiring a second job or having your spouse acquire employment. Additional earnings can be invested or used to pay off outstanding debts. By ridding yourself of credit card balances, you avoid unnecessary interest charges. You, therefore, free up your money for retirement savings.
Consider downsizing your home to potentially save on utility bills, repairs, and, perhaps, property taxes. You may opt to relocate, if you live in an area with a high cost of living. Use the proceeds from the sale that you do not need to satisfy the old mortgage or other debt to purchase a new home. Any additional proceeds should be put into savings for your retirement years.
At Henssler Financial, we believe you should Live Ready. This includes planning ahead for your retirement years. Be sure to periodically review your goals, as your financial situation and the economic climate may change. As conditions change, the plan may need to be adjusted. If you have questions regarding this Tax Strategist topic or need tax planning and consulting, please contact your Tax Consultant.
Disclosures:
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
