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Not only do you score an interview, the company eventually offers you the job. Employee benefits include health insurance, paid holidays and sick days.
Missing from the mix: your dream job doesn’t offer a 401(k) plan or other qualified retirement-savings plan. Despite this, you accept the offer because the position gives you the opportunity to thrive in a new and exciting career.
Not having a 401(k) plan hardly means a retirement plan is out of the question. You still have many options to create your own retirement plan. Depending on how much of your income you have available for savings, you can maintain multiple types of Individual Retirement Accounts (IRAs). An IRA is a commonly-used tool for retirement planning. Like a 401(k), IRAs offer tax-advantaged savings. But the one most advantageous to you depends in part on how close you are to retirement.
Under current Internal Revenue Service (IRS) rules, “the most you can contribute to all of your traditional and Roth IRAs is the smaller of: $5,500 (for 2014 and 2015), or $6,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.”
So, what are your options?
With a traditional IRA account, you may be able to deduct some or all of the contributions you make toward your savings from your income on your IRS tax returns. The IRS website details rules you must follow.
In addition, traditional IRA funds are also tax-deferred, meaning the contributions are not taxed when they are made. Instead, you’re taxed when you withdraw the money, ideally when you retire. (You may pay a penalty if you withdraw funds from your IRA account before you are 59 ½ years of age.)
Keep in mind that when you turn 70 1/2 years of age, you are required to make minimum distributions, or withdrawals, from the account, even if you are still working.
To determine how much you could save with this option, check out Bankrate’s traditional IRA calculator.
A Roth IRA is an after-tax retirement plan recognized by the IRS. It allows you to take after-tax dollars and sock them away in an account where they will grow tax-free forever (at least according to current IRS rules).
In contrast to the traditional IRA, there is no required minimum distribution with a Roth IRA, and as long as you have earned income, you may continue to contribute to a Roth IRA even after age 70 ½. While Roth IRA contributions are not tax deductible, your contributions may well be tax-free when you withdraw them at retirement and the account meets qualified distribution requirements. In addition, you may withdraw contributions (but not earnings) tax-free five years after making the contribution.
The IRS limits who can contribute to a Roth IRA. For 2015, those couples filing jointly with an adjusted gross income of $183,000 or below may contribute up to $5,000 each into a Roth IRA. If you’re single, you may earn up to $116,000 and still qualify for a Roth IRA. If you’re age 50 or over, you may contribute an extra $1,000 per year as part of the “catch-up” provision.
See how the differences compare with a traditional IRA using Bankrate’s Roth IRA calculator.
If you had a 401(k) from your previous employer, you could roll over those contributions into a traditional IRA. Depending on the situation, one could wind up making more money by leaving the employer-sponsored retirement fund as is. At the same time, if you value personal control, rolling your 401(k) into an IRA gives you that control and access to more choices.
What’s most important is that you rollover your 401(k) by doing a “trustee-to-trustee” transfer. This will ensure that your entire sum rolls over and you will not have 20 percent of your withdrawal amount automatically taxed. Contact your corporate benefits manager for details on how to start an electronic “trustee-to-trustee” transfer and talk to your tax preparer for details on how to complete the transfer so that the funds don’t touch your personal accounts.
IRAs serve an increasingly valuable role in saving for retirement for American households, according to the Investment Company Institute (ICI). Yet “only 12 percent of U.S. households contributed to any type of IRA in tax year 2013, and very few eligible households made catch-up contributions to traditional IRAs or Roth IRAs,” an ICI survey showed.
Still, compared with two decades ago, IRAs are on the upswing, slowly growing as an important retirement vehicle.
“With $7.3 trillion in assets at the end of the third quarter of 2014, individual retirement accounts [IRAs] represented 30 percent of U.S. total retirement market assets, compared with 18 percent two decades ago,” according to the survey.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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