Various Savings Methods

Are you saving for retirement?  What retirement accounts are you taking advantage of?  There are several different retirement accounts available to most people.  The key is to use them to your advantage and start early saving as the power of compounding interest is really something to behold.  Anytime you can save for a period of over 30 years your savings will grow at an unbelievable rate.  If you do not believe me go into Excel and us its Future Value (FV) function and play with returns, payments, and the number of years you will have the funds in savings.  It is an easy way to see what could be in say 30 or 35 years if you started saving now. The first place people need to save is their company’s 401(k), the Thrift Savings Plan, and most 457 plans.  Now there are two types of savings in these accounts provided they are offered by your company and that is a traditional contribution where you are not taxed now on the money or a ROTH contribution where you are taxed on the money now but the distributions will be tax free.  You are allowed to contribute up to $17,500 into these plans on an annual basis and those over the age of 50 may contribute an extra $5,500.  Now these figures are adjusted for inflation so in theory they will increase some years and not in others. Now an IRA is another savings option for those who want to save outside of the workplace in a tax advantaged account.  Now these are like the employer sponsored plans and have a traditional and a ROTH feature.  The ROTH IRA is available for individuals who earn less than $129,000 a year and couple earning less than $191,000. These amounts like the contributions above are adjusted for inflation.  For those who earn over the maximum amounts they are able to make after tax contributions to a traditional IRA and then have the option of converting it into a ROTH.  For a traditional IRA the contributions may be tax deductible so the savings will grow tax deferred and taxed as ordinary income when they are taken out after age 59 ½.  The annual contribution limits for 2014 are $5,500 with a $1,000 catch-up for individuals over the age of 50. If you are self-employed, have a consultant business, or freelance you may contribute to a SEP IRA.  If you make money by any of these means and possibly others provided they meet the definition for self-employment by the IRS this is a great way to save in a tax deferred account.  Currently you are allowed to save up to 20% of your self-employment income, minus half your self-employment tax, up to $52,000 a year.  The contributions are tax deductible and grow tax deferred and are taxed as ordinary income when you make withdrawals after age 59 ½. Now if you have maxed out your savings in your company’s retirement account, have maxed out your IRA contributions, and are not eligible for a SEP IRA you should save in a brokerage account.  There are a few reasons why this is an attractive option.  One as it is not a retirement account you can take funds out at any time for any purpose and pay the corresponding taxes on the money.  Also these types of investments while not tax deferred are tax advantaged.  For most investors the long-term capital gains tax and dividend will be taxed at 15%.  If you are in the 10%-15% tax bracket your taxes could be zero.  While you are paying taxes in the year the income was realized it is taxed at a much lower rate than ordinary income. For higher earning individuals who want to save in a tax deferred vehicle there are variable annuities.  While in the past these vehicles have had a poor image with investors due to their high fees and surrender charges they have changed in recent years.  But it is up to you as the investor if the fees outweigh the tax advantaged status.  There are some companies that offer good choices for low cost variable annuities so research and look at Vanguard and Fidelity. There are many ways to save for retirement and no one way is correct.  The best approach is for you to use as many of these options as you can to maximize your investment options and reduce your overall portfolio risk.  Company plans are great as they are automatic and in many instances offer a company match but may not offer the best investment options.  All the IRA’s are good choices as they allow you as the investor to pick and choose what you want to invest in and in most instances you are free to invest in equities, bonds, ETF’s, and mutual funds.  And annuities even can have a place in your retirement plans but they as a rule do not make sense for everyone.

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