Saving for retirement is an important part of planning for a financially secure future. LGA’s Partner and Co-Managing Director of Tax, Scott Sagan dives into best practices that he uses to advise clients with a variety of circumstances and needs. It’s helpful to use the three A’s of successful retirement saving: Amount, Account, and Asset mix. Today we’re going to focus on Account, which has to do with which vehicle your money is invested into.
How does a person determine which type of account to contribute to?
There are several things to consider, but for many, the answer comes down to a simple question: Am I better off paying taxes now or later? For those who expect their tax rate in retirement to be higher than their current rate, tax-free withdrawals from a Roth 401(k) or IRA might be a better choice. On the other hand, for those who expect their tax rate to go down in retirement, a traditional 401(k) or traditional IRA may make more sense.
You don’t have to go “all in” either choice, right?
No, contributing to both a traditional and Roth accounts can provide the flexibility of taxable and tax-free options when it comes time to take withdrawals in retirement, which can help manage taxes. Those who aren’t sure of their future tax picture could choose to make both types of contributions.
What other options do people have?
Alternative saving options to consider:
- If you’re self-employed or a small-business owner, then small-business retirement plans like a self-employed 401(k) or SIMPLE or SEP IRA allow you to set aside a certain percentage of your income.
- You may be able to contribute to an IRA even if you aren’t working. As long as one spouse works, the non-working spouse can have a spousal IRA and contribute to their own traditional IRA or Roth IRA. You must file a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.
- HSAs offer one of the most effective means of saving for qualified medical expenses now and in retirement. Depending on the type of account, your contributions can grow tax-deferred or tax-free.
Is year-end always the deadline?
If you contribute to an employer sponsored retirement plan then all of your contributions made are completed on a calendar year. If you choose to contribute to either a traditional or a ROTH IRA then you can make a contribution up until the original tax filing deadline which is traditionally April 15th.
If there’s anything we can do to help or answer any questions you may have please contact Scott Sagan, CPA.
Scott A. Sagan, CPA joined LGA in 2010 bringing over 30 years of experience in accounting, audit, individual and corporate taxation, and business advisory services to a diverse client base. Scott’s clients include owner-managed businesses in the areas of manufacturing, distribution, home health service companies, auto dealerships, real estate developers, and professional services firms. He advises clients on banking and funding relationships, as well as tax and accounting issues, taking great pride in helping guide his clients through every phase of the business lifecycle from startup to sale or succession.