Are you worried about the current state of the Social Security system and how its future may affect your retirement income? It’s important to take a long, hard look at your current savings strategy to ensure you’ll be able to compensate for this, or any other, retirement income shortfall. Here are some important savings strategies that can help you work towards your retirement income goals.
Participate in your Employer’s Retirement Plan
Regular contributions to an employer-sponsored retirement plan, such as a 401(k), can be an essential part of solidifying your retirement savings program. Contributions to such plans offer three key benefits: they are made with pre-tax dollars; they reduce your current taxable income, and they enjoy tax-deferred accumulation.
Start an IRA
An IRA (Individual Retirement Account) is a retirement savings vehicle that gives individual taxpayers the opportunity to accumulate tax-deferred earnings on contributions. You can contribute up to $6,000 (or $7,000 if you are age 50 or older) per year to an IRA, and contributions are tax-deductible under certain circumstances. It is the combination of these two key benefits—tax-deferred accumulation and deductibility of contributions—that makes an IRA an important retirement savings vehicle for many individuals. Earnings on all contributions enjoy tax-deferred accumulation and incur federal (and, in some cases, state) income taxes only upon withdrawal. Deductible contributions also incur income taxes upon withdrawal. Bear in mind, any withdrawal from an IRA prior to age 59½ may result in a 10 percent federal penalty tax (in addition to federal and state income taxes). In addition, withdrawals must commence when you reach age 70½, at which time you must also stop making contributions.
Consider a Roth IRA
This savings mechanism is unique in that contributions not only accumulate on a tax-deferred basis but may also be withdrawn free of federal (and sometimes state) income taxes under certain conditions. However, unlike a traditional IRA, you may not deduct any contributions to a Roth IRA. You can contribute up to $6,000 (or $7,000 if you are age 50 or older) per year to a Roth IRA if your income meets certain eligibility requirements. Withdrawals made after age 59½ and after the Roth has existed for more than five years can be made federal income tax free (and sometimes state income tax free), and penalty-free. Also, penalty-free withdrawals prior to age 59½ are allowed for qualified first-time home purchases up to a $ 10,000-lifetime limit. Finally, you do not have to begin taking withdrawals at age 72 from a Roth IRA, and you can continue making contributions after age 72 if you are still working.
Annuities Can go a Long Way
Many people who have become accustomed to the benefits of IRAs also look favorably upon annuities. Annuities come in a variety of options, none of which are subject to the eligibility requirements facing both traditional IRAs and Roth IRAs. Although you cannot take a tax deduction for the money (premiums) put into an annuity, your premiums do enjoy tax-deferred accumulation until withdrawal. Like IRAs, withdrawals from an annuity prior to age 59½ may incur a 10 percent penalty tax. Also, insurers may have their own set penalties for withdrawals taken within the first several years of an annuity’s existence. With annuities, you do not have to begin taking withdrawals when you reach age 72. Also, there is no annual limit on how many premium dollars you can place into an annuity.
Meet with a Financial Professional
The key to building and maintaining a comprehensive savings strategy is to seek the guidance of a financial professional. Regular reviews may help decrease your insecurity about Social Security and help you make appropriate choices for your particular situation.