Having enough money to last throughout retirement is an extremely important financial goal for most people. The CFS Advisors at Amplify Wealth Management will design a retirement savings strategy that analyzes your current finances and your long-term goals.
Individual Retirement Accounts (IRAs)
An IRA can be an important cornerstone when building your retirement savings plan. Different types of IRAs have different rules and offer different types of potential tax advantages. You may be able to open and contribute to an IRA account as part of your retirement strategy.
Many people like the fact that they can choose how their dollars are invested: in mutual funds, share certificates, annuities, and in many other investment types.
If you have earned income, you’re eligible to contribute to a Traditional IRA. Contributions made to a Traditional IRA are generally deductible from taxes at the time they are made. When withdrawals are made from the IRA, the contributions and earnings are taxed at the appropriate rate for your tax bracket at that time.
After you reach age 59 ½, you can begin to take distributions from your IRA without penalty. With traditional IRAs, you are generally required to start taking distributions from your IRA by April 1st of the year following the year in which you reach age 70½. Tax penalties are incurred if you fail to receive your required minimum distribution (RMD). Consult your Tax Advisor and financial professional for more information.
A Traditional IRA may be a good choice for those who:
- are eligible to make tax-deductible contributions;
- have annual income which exceeds qualifications for a Roth IRA;
- want to build savings that could be converted to a Roth IRA later; or
- think they will be in a lower tax bracket at retirement.
In general, contributions made to a Roth IRA are taxed when they are made. Earnings compound tax-free. Contributions and earnings from a Roth IRA can be withdrawn at retirement on a tax-free basis if holding requirements are met.
Since you pay taxes on contributions to a Roth IRA at the time they are made, you enjoy tax benefits at retirement. Funds which accumulate in a Roth IRA can provide tax-free income later in life. Any funds which remain in your account after your death can provide tax-free income for your heirs.
A Roth IRA may be a good choice for those who:
- want tax-free income in retirement;
- want to avoid required minimum distributions (RMDs) when they reach age 70-1/2 (distributions are required from a Traditional IRA at that age);
- expect to be in a comparable or a higher tax bracket when they retire; or
- want to leave tax-advantaged income to their heirs.
IRA Rollovers and Roth Conversions
Many people have funds remaining in a 401(k) plan with a former employer. Rolling over those funds into an IRA can give you more flexibility and control over your retirement savings.
You may gain flexibility and control by rolling over, converting or consolidating your existing retirement savings plans and accounts. Here are some considerations to discuss with your Investment Advisor:
- Organization. Keeping track of multiple retirement accounts at multiple institutions can be a challenge. Consolidating your retirement accounts into a single IRA makes managing these funds simpler and more efficient. Taking distributions is also much easier when your retirement funds are in a single IRA. Finally, managing beneficiary information is simpler when you have one account.
- Control. If you keep retirement savings in a former employer’s 401(k) plan, you’re limited to the investment options they offer. When you rollover your 401(k) into an IRA, you and your Advisor can choose where the funds will be invested.
- Flexibility. Once your retirement savings have been rolled over into a traditional IRA, you can convert a portion of the funds to a Roth IRA. While you will have to pay taxes on the amount converted in the tax year of the conversion, the Roth IRA provides tax-free distributions once you meet certain requirements. If you think tax rates will increase, or if you expect to be in a higher tax bracket at retirement, this may be a good strategy.
Retirement Plans for Small Business Owners and Those Who Are Self-Employed
If you own a small business or are self-employed, your Advisor can help you with tax-advantaged retirement savings using SEP (Simplified Employee Pension) plans and SIMPLE (Savings Incentive Match Plan for Employees) IRAs.
A SEP Plan allows business owners the flexibility to adjust employer contributions with business activity each year. With a SEP IRA, business owners can make tax-deductible contributions to an individual retirement account on behalf of each eligible employee, including themselves.
A SEP plan:
- Requires that the employer make contributions, but the amount of the contributions can vary from year to year, based on business activity
- Allows employers to make tax-deductible contributions up to 25% of eligible contributions. The maximum annual contribution is determined by the IRS
- Is generally used by business owners who earn high incomes and have a limited number of eligible employees
- May offer consolidation of retirement accounts through rollovers from former employers' plans or in other IRAs
SIMPLE IRAs are easy to administer and require little paperwork.
- May be used by businesses with 100 or fewer employees
- Allow the employer to deduct contributions as a business expense
- Are mostly funded by elective employee salary deferrals, however employers are required to match or make non-elective contributions
- Allow employers to make pre-tax contributions from their compensation into their account