How should you save for retirement if you aren’t covered by an employer plan?
Financial Planning is a means to help people achieve their goals, and usually the largest and most common goal is retirement. Whether it’s completely quitting your job, continuing your career in some reduced role, or pursuing an “encore career,” at least some level of long-term savings will be needed over the course of your life.
401(k)s and other employer provided retirement plans are an easy answer for many who are eligible for them. In the case of a typical 401(k):
- You can defer as much as $18,500 per year, with an additional catch-up contribution of $6,000 per year for those age 50 or older.
- Deferrals are not taxable income to the employee .
- Investments grow tax-deferred, and funds are not taxed until they are taken out in retirement.
- Penalty-free withdrawals can start as early as age 59 ½.
- Most plans have at least some match provided by the employer.
Unfortunately, not everyone is eligible or has access to such plans. According to a Pew analysis of 2012 Census Bureau Survey of Income and Program Participation Data, more than a third of private sector workers do not have access to an employer-sponsored retirement plan. If you fall into this group of people and are not self-employed, there are still some helpful options available to you. You can either invest in an Individual Retirement Account (IRA) or a Brokerage account. If you are self-employed, you have some additional, more robust options available to you. For now, we will focus on those who are not self-employed.
Below you can see the most important differences between a Traditional IRA, a Roth IRA, and a Taxable Brokerage account.
- Contribute up to $5,500 ($6,500 if age 50 or older) each year and receive a reduction in taxable income equal to the amount you contributed.
- Funds grow tax-deferred, until you can withdraw them penalty-free at age 59 ½, at which point distributions are taxed as regular income.
- Again, you can contribute up to $5,500 ($6,500 if age 50 or older) each year, but you will not receive a reduction in taxable income.
- Funds grow tax-deferred, until you can withdraw them penalty-free at age 59 ½, at which point distributions ARE NOT taxed.
- You can contribute as much as you’d like to a brokerage account, but you will not receive a reduction in taxable income.
- You can take money out whenever you would like and the actual distribution is not taxed as regular income.
- Instead, you are taxed on any investment income (dividends, interest, capital gains distributions, etc.) and any realized gains you receive each year. Although, much of that income could be taxed at rates lower than regular income.
What Should You Use?
Knowing which account to use will vary depending on your own situation. For many, a Roth IRA is the ideal first choice. However, if you anticipate having a much lower taxable income in your retirement years, it could be beneficial to start with a Traditional IRA. A taxable brokerage could also be a complimentary option, if you anticipate needing funds earlier than age 59 ½. Ultimately, there are other aspects of each account that may be impacted by your particular circumstances. The important thing is that you simply get started! If you would like to discuss beginning your DIY retirement and which account may be best for you, please feel free to reach out.