Innovative Retirement Plans Can Give You an Edge When You Retire
Retirement planning is seeing a paradigm shift in recent times, with states taking on the onus of ensuring that residents have a retirement fund in place. This is primarily because state exchequers face a huge drain on resources when workers with no savings reach retirement and keep needing services like Medicaid or food assistance.
How Can You Make the Most of the “New” Retirement Planning Paradigm?
Here are a few innovative options that you should consider, if you want to explore the benefits of the way states treat retirement savings today:
- 401K Plans (Basic or Solo) – A 401K plan involves your employer setting up your retirement account. It offers current and future benefits, especially since funds in it are tax-deferred, helping you build a decent nest egg for your future.
A basic 401K account is set up by the employer with contributions by both the employee and employer, up to $18,000 of pretax earnings for those under 50, and $24,000 for those 50 or older.
A solo 401K account is set up by a sole proprietor or self-employed individual who contributes as both the employer and employee, up to $53,000 for those under 50 and $59,000 for those 50 or older.
IRA Plans – Other than traditional IRA plans, there are three options that really help with retirement planning:
- Simplified Employee Pension or SEP IRAs are typically used by self-employed individuals and small businesses. Employers can contribute up to $53,000 or 25% of their earnings, whichever is less, and must also contribute for all eligible employees.
- SIMPLE IRAs are used by employers with fewer than 100 employees, who can match employee contributions or make unmatched contributions. In 2015, the contribution limit was $12,500 for employees under 50, and $15,500 for those over 50.
- Roth IRAs do not have any tax deduction for contributions, which are made with after-tax dollars. You cannot contribute if you earn more than $131,000 (single) or $193,000 (married and filing jointly).
Contribution limits are reduced if you earn more than $116,000 (single) or $183,000 (married and filing jointly). These limits apply to total contributions made to both Roth and traditional IRAs (which you can convert into Roth IRAs).
Funds grow tax-free, you are not required to take mandatory withdrawals after 70, and withdrawals are tax-free after the age of 59.5. Also, if you’re withdrawing funds of the same value as your contribution (not earnings), there is no penalty or tax on them.
Funds are taxable at the time of withdrawal, but till that time, the money in IRA accounts grows tax-free.
Health Savings Account – This vehicle allows you to undertake medical expenses not covered by your health insurance plan. Annual contribution limits are $3,350 for individuals under 55 ($4,350 for 55 and up) or $6,650 for families.
Withdrawals made before the age of 65 (if they’re not for medical expenses) incur a penalty and taxes, but if you’re 65 or older, you only pay taxes on withdrawals. The money grows on a tax-deferred basis, and you can use it for any reason after 65.
Is a Savings Plan Enough on Its Own?
While financial planning may be in your control, the possibility of untimely death is not. This is where life insurance comes into play. The type and amount of insurance should be determined by various factors, such as the number of dependents and the expenses that your family will need to meet.
Whatever the case may be, it’s better to oversize your insurance investments but definitely not run the risk of under-sizing them. Insurance is that key differentiator which takes your retirement plan from good to great!