Do You Have a Retirement Plan?

July 21, 2011

Retirement Planning 101
Do you have a retirement plan?  According to the US Department of Labor, less than half of Americans have calculated how much they need for retirement.  That is a sobering statistic considering that the average American is living longer, and jobs and money are not getting any easier to come by. A number of options are available for retirement savings (not including stuffing money in the mattress). 

IRAs (individual retirement accounts) were first introduced in 1974 by the Employee Retirement Income Security Act.  It is a personal savings plan that allows money to be set aside for retirement and offers a number of tax advantages.  To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year. You, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.  Contributions into an IRA are made with “pre-tax” dollars, and you may be able to deduct some or all of your contributions.  Amounts in your traditional IRA, including earnings, generally are not taxed until distributed to you. 

Roth IRA
A Roth IRA differs from a traditional IRA in several respects.  A Roth IRA does not permit a deduction at the time of contribution.   Regardless of your age, you may be able to establish and make nondeductible contributions to a Roth IRA.   Roth IRAs also have limitations on the amount that can be contributed and the time of year that contributions can be made. This year, the maximum contribution is the lesser of $5,000 ($6,000 if the individual is age 50 or older), or the individual’s taxable compensation for the year. 

SEPs are Simplified Employee Pensions that allow employers to contribute to traditional IRA’s set up for employees.  To participate in a SEP, an employee must meet be 21 or older, worked for the employer in at least 3 of the last 5 years and received at least $550 in compensation from the employer during the year.  Contribution limits for a SEP are 25% of the employee’s compensation or $49,000.

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. SIMPLE IRA’s are most commonly offered by small employers not currently offering a retirement savings plan.  To be eligible for a SIMPLE plan, an employee must have earned at least $5,000 in compensation during any 2 years before the current calendar year and is expected to receive at least $5,000 during the current calendar year.  The amount the employee contributes to a SIMPLE IRA cannot exceed $11,500.

A 401(k) plan is a defined contribution plan offered by a company to its employees which allows employees to set aside tax deferred income for retirement, and in some cases employers cam match the employee’s contribution either dollar for dollar, or as a percentage.   The major tax advantage of the plan is that elective deferrals to the plan and investment gains are not subject to federal income taxes until distributed from the plan.  The current annual contribution limit for 401K plans is $16,500, starting in 2012 this limit will be indexed for inflation (can move up in $500 increments depending on inflation).

Of course, retirement planning requires more than a few paragraphs to explain your options.  The IRS offers more information on retirement planning on their IRS Retirement Plan Tax Information Page.
Wallace and Associates is here to partner with you on this life long journey.