Those without an employer-sponsored retirement plan have other options that can achieve the same financial goals.
By Mike Kappas
Recent information from the Bureau of Labor Statistics shows that over 30 percent of Americans lack access to employer-sponsored retirement packages. This is even more of a concern for small business employees, as only 53 percent of workers in businesses with one to 99 employees have access to retirement benefits. Undeniably, retirement savings are the key to a healthy financial future. If you are self-employed or your workplace does not provide access to an employer-sponsored retirement plan, it is imperative that you explore your options and find a saving strategy that works for you. Here are some key options and strategies to consider:
Invest in an Individual Retirement Account (IRA): An IRA is the most popular option among savvy retirement savers and comes in two different forms: Traditional & Roth.
Traditional IRA: Contributions to traditional IRAs are tax-deferred until you withdraw the money from the account. At that point, tax will be assessed on your savings and the earnings. Keep in mind, if you withdraw any funds before age 59 ½, that money will be subject to a 10 percent early withdrawal penalty (with a few exceptions).
Roth IRA: Roth IRA contributions are made on an after-tax basis and earnings can grow tax free. If you are under the age 59 ½, you can withdraw contributions made to your Roth IRA anytime, tax and penalty free. However, depending on your age and the holding period, the earnings associated with your withdrawal may be subject to taxes and penalties. You may be able to avoid penalties on the earnings if you meet specific conditions.
For 2016 and subject to Modified Adjusted Gross Income (MAGI) limits, the contribution limit for both Traditional & Roth IRAs is $5,500 ($6,500 if you are age 50 and older). IRAs offer a wider selection of investment options in comparison to a 401(k), so they require more attention in order to manage investments and fees.
Consider a Simplified Employee Pension Individual Retirement Account (SEP IRA) or Solo 401(k): If you are self-employed there are several other options you'll want to look into.
SEP IRA: This account has higher contribution limits than the Traditional or Roth IRA (the lesser of 25 percent of your income or $53,000 in 2016), and contributions are tax-deductible. SEP IRAs also allow you to set up retirement benefits for any employees you might have as well.
Solo 401(k): This account is a traditional 401(k) plan covering a business owner with no employees, or the business owner and their spouse. As a business owner you wear two hats in a 401(k): Employee and employer. According to the IRS, the contribution limits for 2016 are $18,000 for elective deferrals plus employer nonselective 25 percent of compensation. Total contributions to a participant's account, not counting catch up contributions for those aged 50 and over, cannot exceed $53,000. The paperwork and management of the Solo 401(k) is more cumbersome than other plans, but allows for higher contribution limits.
Set-up automatic transfers: Successful retirement savers owe much of their success to the automated nature of savings. If you never see the money, you can't miss it or decide to spend it. Make it easy on yourself to save by setting up automated payments to your retirement account.
Don't neglect your emergency savings: Keep in mind that everyone needs some liquidity in their savings, and be sure to continue to contribute to an emergency savings account that can be easily accessed without penalty.
These options are a good starting point to begin a plan for your financial future. Before any decisions are made, it may be beneficial to speak with a financial advisor about options for your unique situation. Ultimately, the goal of saving for retirement now is to save you stress and worry down the road, while putting yourself in a position to enjoy your non-working years.
MikeKappas is the President and CEO ofApprisen,a Columbus-based not-for-profit financial services specialist providing financial resources for employers and individuals.