Did you know that, on average, the greatest expense any of us will encounter in our lives is the cost of retirement?
For most of us the days of cushy pensions are long gone...
The responsibility to save and invest for retirement falls squarely on our shoulders.
As you review your many retirement options, here are some considerations to help you decide which individual retirement plan to fund.
First, you can never contribute more than you earn through working to a retirement plan - unless you are a spouse and your working partner funds a spousal IRA for you.
So what are the choices?
- The first choice is the bread and butter of retirement savings: the traditional IRA. If you are not covered by another plan at work, then your contribution is tax deductible (with some income thresholds) and will grow tax-free until you take out money in your retirement.
- The next and newer choice is the Roth IRA. Funds are contributed after-tax and so they are not deductible versus your income. However, funds in a Roth grow tax free and can be withdrawn after age 59 1/2 with no income taxes!
Here are the contribution limits for both plans in 2010:
- Under age 50: $5,000
- Age 50 and above: $6,000
So which one should you choose? In general, the longer you have until retirement, the more sense a Roth IRA makes since you are paying tax now on a (supposedly) smaller amount and no tax later on the larger amount.
But what else is available? Are there other choices?
If you are self employed with no employees, you have two excellent choices worth investigating:
- First, the IRA/SEP allows for maximum, tax-deductible contribution of $49,000 in 2010 bounded by 25% of your AGI. No special tax filings need to be made for this.
- The other is an individual 401(k) plan called a Uni(k). You can contribute the normal deductible 401(k) limit of $16,500 and also add a profit sharing kicker to max out to $49,000.
Remember, there are many variables to consider and it's important to make the right choice so it is always best to consult with a professional. If you would like us to recommend an advisor for you, just give us a call.
All of us here at Hill & Hamilton wish you a less taxing year in 2010... regardless of how unrealistic this wish might be!