Retirement planning at any age is a daunting task. When you consider starting in your 20s and 30s, things really become complicated. For starters, car payments, insurance, and rent take up the bulk of your income. Follow this by adding the student loans, cell phone, gas, food, and entertainment. There is not much left for retirement accounts. You may feel as though you are in the paycheck to paycheck cycle. However, experts recommend this is the ideal age to start a retirement plan.
A litany of excellent options are available that are based on your employment industry. For example, teachers and those that work for non-profits will have alternatives to bolster their retirement piggy bank. Regardless of the career you work in, there are several stress-free opportunities to exploit. Once you start a new job, pay attention in orientation. This session will have information about any employer sponsored options. Hang on to all the literature as it will contain details related to available retirement plans.
The only real up-front investment is time spent reading and becoming familiar with the choices available to you. If questions arise during this period, write them down. Follow this by including each type of plan, eligibility, and enrollment requirements and timelines. In addition, check-out any retirement calculator tools offered by your employer. Play around with them to see how much you should be saving towards a comfortable retirement. Human Resources will be the point of contact to answer inquiries that come up over time.
Always enroll in the employer contribution plans as they’re additional income that stretches your current salary. A caveat is that you can participate in more than one retirement plan at any given time. It’s a good idea to have a few assets working to help you reach and surpass any goals that are set. You should also do regular check-ups to ensure you are on track.
IRA Accounts
Traditional Individual Retirement Account (IRA)
This is the most popular plan available that is open to everyone. It's easy to start with an end of the year deposit between Christmas and New Year’s Eve. A built-in reminder is to use the last check of the year to open an account and keep the ritual going each year. There is also the bonus of a tax write-off for the amount of the deposit. Regardless of the industry you work in, traditional IRAs should be part of the retirement plan.
Getting Started
IRAs can be started with a bank, life insurance company, a mutual fund, or a stockbroker. If you do not have a brokerage account with a reputable firm, now is the time to open one. It will serve as the distribution hub when retirement starts. This is also the place to have mutual funds explained in detail. Basically, they're funds with tons of investors pooling their money together to buy specific securities (stocks and bonds).
Eligibility
Anyone under the age of 70 can open an IRA account.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
You are allowed to make withdrawals based on your household status and income level, but they're taxed when you do. A chart displays what the available withdrawal limits. For example, single have three options including full, partial, or none at all. If you are married, deductions come in two categories: none and partial.
Roth IRA
The same options apply to start a Roth IRA as a traditional IRA. It's a wise idea to open a ROTH IRA in addition to a traditional one. It increases the tax breaks as well as adds more retirement money in the bank.
Getting Started
See traditional IRA sources.
Eligibility
Individuals under the age of 70 can start a Roth IRA.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
ROTH IRAs are not tax-free contributions. However, all distributions are tax-free when certain conditions are met.
401K Accounts
Traditional 401(k)
There are two types of 401(k) plans:
- Standard
- SIMPLE
This is an important distinction as the employee deferral or employee contribution has different limits. Several special features are provided such as a catch-up option to maintain any previous yearly contribution amount. Another opportunity is to link it to a Roth IRA to take advantage of its rules. This is free money as the employer contributes a set amount in addition to yours. You should take full-advantage of this option.
Getting Started
Human Resources will be able to answer all the questions regarding your employer’s 401(k) plan.
Eligibility
Requirements to get started will vary based on the employer. Some allow participation from day one while others make employees wait up to a full year. The popular time-frame is after 90 days.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
Contributions are not taxed at the time they're withdrawn from each paycheck. There is no additional write-off opportunities during the tax season.
IRC 403(b)
A 403(b) is also known as a TSA (tax shelter annuity) plan. Employers may also add contributions. Employees are allowed to defer income based on contribution limits without being taxed. Loans for a variety of reasons are acceptable including hardship. This option has flexible contributions not found in other plans.
Getting Started
Speak with your Human Resources Department regarding how to get started. They will usually have a packet at orientation during the hiring process.
Eligibility
This plan is found at public education institutions, 501(c)(3) groups, and churches. If you work for any of these types of organizations, you are eligible.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
Due to the deferred option that does not tax contributions, there is no tax write-off. No special forms or reporting is required when you file annual personal income taxes.
Pensions
SEP
Simplified Employee Pension Plan is another variant of the traditional 401(k). However, the employer contributions are deposited into a traditional IRA. If you own a business (self-employed), you can also establish one. There are no salary deferrals to avoid taxation, options to contribute in a catch-up scenarios, or loans.
Getting Started
This plan can be set-up in any industry. Discuss this with HR to see if it's an option for your employer.
Eligibility
Any employee can participate where the plan exist.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
No write-off features exist for this choice.
Defined Benefit Plan
There are three types of Defined Benefit Plans:
- Hybrid
- Cash Balance
- Pension Equity
You will not know what type of plan your employer has unless they review this or you ask. This a pension plan that provides a fixed retirement benefit. Generally, it can only be distributed at the age of 62, although employers have an early retirement option available. To join the plan, employers use a feature known as vesting based on the years of service employees accumulate. You are considered an actuary and must complete a Schedule B for form 5500.
Getting Started
An automatic trigger is activated based on the number of years you work for the employer.
Eligibility
Vested employees are the only ones eligible to participate.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
Pension plans do not provide tax write-off allowances.
Money Purchase Plan
Employers must make annual pension contributions to an account for each employee at a set percentage of their compensation. Benefits are based on gains and losses as funds may be invested, sitting in a savings account or part of a mutual fund.
Getting Started
During the hiring process, this information should be reviewed with you. Human resources will have details in literature format.
Eligibility
All employees are eligible without needing to reach a vesting or time in service requirement.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
No write-off amounts can be applied to annual federal income taxes.
Miscellaneous Retirement Options
Profit Sharing Plans
Corporate organizations are moving towards this option in lieu of traditional retirement plans such as a pension and 401(k). The amounts contributed are based on a complicated comp-to-comp calculation. You will need to reach out to Human Resources for them to explain how the formula works. Form 5500 and participant disclosure forms must be filed with your annual federal income tax. Loans are permitted with this plan.
Getting Started
This may seem a bit redundant – but contact HR with any questions on the specific plan for your employer.
Eligibility
Employees of the company offering this option can participate.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
This plan does not allow any tax write-offs.
Employee Stock Ownership Plans or IRC 401(a)
These types of plans are known as ESOPs. You may have heard co-workers using this term around the water cooler as they talk about the company’s stock prices. This is because a plan’s value is a direct correlation to the price of the real-time traded value of company stock. Companies allow their employees to buy stocks at a discounted rate during specific times based on its value on the day it's purchased. There will be several opportunities throughout the year to take advantage of this alternative. Most employers open this process up each quarter.
Getting Started
Make an inquiry with the Human Resources Department to see if your employer has an ESOP option.
Eligibility
If a plan exist, all employees are eligible.
- Contribution Limits
- Withdrawal Limits
- Tax Write-off Limits
Stocks are generally purchased using pre-tax income similar to a deferred plan format. However, taxes are paid as income on the amount they sell for.
For more information, visit irs.gov.
