Thrive: Saving for Retirement

Thrive: Saving for Retirement | Food & Nutrition Magazine | Volume 9, Issue 2
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It’s hard to imagine retirement when financial news headlines seem to be reporting dire projections — from a rapidly depleting social security fund and downward mobility of the retired middle class to story after story of older workers unable to retire because they need money. Despite the steady stream of negative media reports and predictions, sticking to these simple strategies can help you prepare for a stable retirement.

Know What to Look for When Seeking a Financial Planner

Fee-only: This means the planner is only compensated by clients for objective advice. They do not sell products and do not make a commission or kickback on any of your decisions.

Fiduciary: Try to find a planner who signs a “fiduciary oath” to adhere to the highest possible standard of care and agree to always put their clients’ interest first above and beyond their own interest and the interest of their business.

CFP®: The Certified Financial Planner is the gold standard in financial planning credentials and education. This designation requires considerable education and career experience, along with passing a comprehensive examination covering all aspects of financial planning.

Make the Match
A direct deposit into a 401(k) for private sector employees or 403(b) for certain employees of public schools or tax-exempt organizations is probably the most common form of retirement savings. In these scenarios, money is taken pre-tax from one’s paycheck and put into a group retirement account. Taxes are paid to the Internal Revenue Service when employees begin withdrawing after the eligible age of 59½ or start making required minimum distributions from the account.

“It is typically a good idea to consider saving into an employer-sponsored retirement plan through work, even if it’s a relatively small amount,” says certified financial planner Ben Smith, founder of Cove Financial Planning in Whitefish Bay, Wis. This is especially true if your employer matches contributions. “If you found $100 on the ground, would you pick it up? Your employer’s 401(k) match is truly found money, and I recommend that people take full advantage of their employer match as their cash flow allows,” Smith says.

Even if you are currently paying off debt or trying to build cash reserves, “It’s hard to beat a dollar-for-dollar return on any investment, which is essentially the case with employer matching,” says Smith. Try to at least contribute the maximum amount that your employer will match. However, if it’s a new job or you don’t think you will be staying at that company or organization, be sure you understand your employer’s retirement plan vesting schedule.

Adjusted Gross Income (AGI): The figure for which your income taxes will be calculated. Essentially, it is a person’s gross income that is then reduced by certain deductions, such as a deductible IRA contribution or student loan interest.

Gross Income: Your total income. Essentially, it is the total money (but also goods, services and property) a person receives that must be reported on a tax return.

Modified Adjusted Gross Income (Modified AGI or MAGI): A figure used by the IRS to determine whether you can take full advantage of tax perks. Essentially, it is a person’s adjusted gross income (AGI) further refined by adding back any tax-exempt interest income and certain deductions.

Pre-tax: A contribution made before federal and municipal taxes are deducted. Contributions might be for a retirement account or other tax-deferred investment vehicle (product).

Tax deduction: An amount, such as traditional IRA contributions (if you meet the requirements), that can help reduce income that is subject to taxation (i.e. lower your tax bracket).

Tax deferred: An account to which you may deduct contributions up front but pay taxes on withdrawals later, such as a traditional IRA (if you qualify).

Tax-free (tax-exempt): An account to which you make contributions with after-tax dollars but pay no taxes on account growth or when you withdraw from the account, such as a Roth IRA.

Required minimum distribution (RMD): The amount you must withdraw from a tax-deferred account, whether you’ve retired or not, after you reach a certain age. This is applicable to traditional IRAs or traditional 401(k)s, but because the contributions to a Roth IRA have already been taxed, there are no RMDs. You can keep all your Roth IRA savings and never withdraw a dime unless you want to.

Vesting schedule: If you employer matches retirement contributions, this is the length of time you must remain their employee before you’re entitled to the match funds should you leave.

Start an IRA
While there are several types of individual retirement accounts designed to help Americans save for retirement, the most common are traditional IRAs and Roth IRAs. Each has unique tax advantages (in a nutshell, pay taxes now or later) and limitations that depend upon income and age.

A traditional IRA allows individuals to contribute up to $6,000 annually ($7,000 for those age 50 or older) and potentially defer paying income tax on those contributions until they start withdrawing in the future. Contributions to traditional IRAs may be fully tax-deductible for individuals who don’t have an employee-sponsored retirement account or who do have an employee-sponsored retirement account but whose modified adjusted gross income is less than $65,000 if filing as single or less than $104,000 if married filing jointly. Contributions may qualify for a partial deduction for those whose modified AGI is less than $75,000 but more than $65,000 if filing as single or less than $124,000 but more than $104,000 if filing jointly.

A Roth IRA is different in that individuals pay income taxes on their contributions up front, but withdrawals from the account after age 59½ and a five-year holding period are tax-free. So, while contributing to a Roth IRA won’t help you save on taxes now, it does give you access to tax-free funds in the future. However, there are limits on who can make contributions to a Roth IRA: Individuals with a modified AGI of less than $124,000 if filing as single or less than $196,000 if married filing jointly may contribute up to $6,000 annually ($7,000 if you’re age 50 or older). Those with a modified AGI of less than $139,000 but more than $124,000 if filing as single or less than $206,000 but more than $196,000 if married filing jointly may make a partial contribution.

Automate and Diversify
Contributing to an IRA takes a little more discipline than a 401(k) that is taken out of your paycheck, but some simple automation can help. Smith recommends setting up a regular transfer from the account to which your paycheck is deposited and coordinate the withdrawals with your pay schedule.

Important to note is that, depending on your circumstances, you don’t necessarily have to choose between a traditional IRA and a Roth IRA. Many people have both.

“It’s important to diversify your ‘tax triangle’ in retirement, which refers to your balance of savings between tax-deferred, tax-free and taxable accounts,” says Smith. “Having access to all of these account types in retirement will ultimately give you more control and choice in terms of how you will take retirement withdrawals, which can lead to lower taxes in the long run.”


For more information, see Smith’s post “What is a Fiduciary, and Why are They Like Dietitians?” on the coveplanning.com blog.

Have a question?

Follow and tweet Ben on Twitter at @BenSmithPlanner.

References

2020 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work. Internal Revenue Service website. https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work Accessed March 17, 2020.
Adjusted Gross Income vs. Modified Adjusted Gross Income: The Difference. Investopedia website. Updated January 20, 2020. Accessed March 17, 2020.
Brandon E. IRA Contribution Limits for 2020. U.S. News website. Published November 7, 2019. Accessed March 17, 2020.
Coombes A, Yochim D. 7 Types of IRAs: Find the One for You. https://www.nerdwallet.com/blog/investing/7-types-of-iras/ Published February 13, 2020. Accessed March 17, 2020.
IRA Deduction Limits. Internal Revenue Service website. Accessed March 17, 2020.
Policy Note. Schwartz Center for Economic Policy Analysis website. Accessed March 17, 2020.
Retirement Savings: Tax-Deferred or Tax-Exempt? Investopedia website. Accessed March 17, 2020.
Retirement Topics – IRA Contribution Limits. Internal Revenue Service website. Accessed March 17, 2020.
Retirement Topics — Required Minimum Distributions (RMDs). Internal Revenue Service website. Accessed March 17, 2020.
Roth IRA Withdrawal Rules. Charles Schwab website. Accessed March 17, 2020.
The Future Financial Status of the Social Security Program. Social Security website. Published 2010. Accessed March 17, 2020.
The Value of Experience: AARP Multicultural Work & Jobs Study Chartbook For Total Respondents. AARP website. Published July 2018. Accessed March 17, 2020.
Understanding Taxes Glossary. Internal Revenue Service website. Accessed March 17, 2020.

Food & Nutrition Magazine
Food & Nutrition Magazine publishes articles on food and diet trends, highlights of nutrition research and resources, updates on public health issues and policy initiatives related to nutrition, and explorations of the cultural and social factors that shape Americans’ diets and health.