When your clients are in the midst of their careers and raising children, saving for college is often the top financial priority. That’s not surprising, considering the ever-increasing cost of a diploma. But saving for retirement is also a pressing issue and generally takes precedence once the kids are off to school.
Typically, clients can build a sizable nest egg for their golden years and feather it, too, through the following six strategies:
1. Take advantage of company plans. When possible, participate in employer-sponsored retirement plans. Pension and profit-sharing plans are gravy; you must defer part of your salary to a 401(k) plan, but it’s usually worthwhile. The IRS sets generous limits so you’ll plenty of leeway. For instance, the maximum deferral allowed to a 401(k) in 2019 is $19,000 and you can chip in an extra $6,000 if you’re age 50 or older. Contributions grow on a tax-deferred basis.
2 Play the “match game.” Speaking of 401(k) plans, you may get some extra bang for your bucks if your employer agrees to match contributions up to a stated percentage. For instance, the company may provide matching contributions equal to 50 percent of employee contributions for the first 6 percentage of salary (i.e., a match of 3 percent of salary). Therefore, if you earn $150,000 a year, the employer kicks in an extra $4,500 to your account each year. Add this to your stockpile.
3. Don’t play dead, but roll over. If you switch jobs or retire, you can take a payout from your 401(k) or other qualified plan. However, the distribution is currently taxable. Alternatively, if you don’t need the money right now, you can roll over the funds to an IRA or other plan to extend the tax deferral. Accordingly, you don’t owe any current tax if the rollover is completed within 60 days. The best option is to arrange a trustee-to-trustee transfer to avoid withholding on the distribution.
4. To Rothify or not? Retirement-savers who have used a traditional IRA to supplement savings in a 401(k), or have rolled over amounts from a 401(k) to an IRA, face another tough decision: If you convert funds in the traditional IRA to a Roth, future payouts after age 59½ are generally tax-free. In comparison, traditional IRA distributions are taxable at ordinary income rates reaching 37 percent. Of course, the conversion is subject to current tax, so you might arrange a series of transactions over several years to spread out the tax and/or reduce your overall liability.
5. Realize benefits from taxable accounts. Although the tax law favors qualified plans and IRAs, you’re still eligible for certain tax breaks for other investments. For example, if you buy and sell securities like stocks, bonds and mutual funds, any long-term capital gains are taxed at a maximum 15% rate, or 20% for high-income investors. On the other side of the ledger, if you realize losses from sales of those assets during the year, the losses can offset capital gains (both long-term and short-term) and up to $3,000 of high-taxed ordinary income.
6. Find your investment balance. Don’t do your retirement planning in a vacuum. Develop a comprehensive plan utilizing a combination of 401(k)s or other qualified plans, IRAs and taxable accounts. Strike the balance that makes the most sense for your situation based on your objectives and personal circumstances. Your tax and financial advisors can help guide the way.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...