Many people get closer and closer to retirement age, fully aware of the fact that they do not have enough money saved up to live comfortably during their retirement years. They rely solely on the fact that there are programs such as Medicare and Social Security to help them, but they do not realize that these programs are slowly shrinking, and are failing to provide an adequate amount of help. For those who do save for retirement, they face another issue: the strict annual contribution limits on tax advantaged retirement savings vehicles.
If you know you don’t have enough money saved up, you should start saving now. Using the following will help you take advantage of tax advantaged savings vehicles by using employer sponsored retirement accounts.
Saving using retirement accounts
With Traditional and Roth 401 (k), 403 (b) and 457 (b) Retirement accounts, you are able to contribute up to $18,000 a year if you are less than 50 years old or $24,000 if you are 50 years old or older. Many employers match contributions and/or provide profit sharing contributions. The maximum contribution amount you and your employer (combined) can make per year is $53,000, based on $265,000 of maximum considered compensation. The traditional 401(k), 403(b), and 457(b) provide an immediate tax benefit and a deferral of income taxes, while the Roth versions forego the immediate tax benefit and provide tax free withdrawals.
Simplified Employee Pension Plan Accounts
SEPs or Simplified Employee Pension Plan Accounts are employer sponsored retirement plans with generous employer contribution limits. Generally, employers can contribute up to 25% of an employee’s compensation. The maximum contribution an employer can make is $53,000 based on $265,000 of maximum considered compensation.
SIMPLE plan accounts
SIMPLE plan accounts (also known as Savings Incentive Match Plan for Employees) are employer sponsored retirement plans with generous employee contribution limits. Generally, you can contribute up to $12,500 per year if you are less than 50 years old or up to $15,500 if you are 50 years old or older. Additionally, employers are required to make contributions to your account on an elective or nonelective basis. The maximum elective match is 3% of compensation, not to exceed $12,500) if you are less than 50 years old or up to $15,500 if you are 50 years old or older. The nonelective contribution is 2% of compensation based on $265,000 of maximum considered compensation.
Individual Retirement account (IRA)
Instead of, or in addition to, employer sponsored retirement plans, you can contribute to an IRA. You can contribute up to $5,500 per year if you are less than 50 years old or up to
$6,500 if you are 50 years old or older. The Traditional IRA provides pre-tax or post tax contributions (based on your income and employer sponsored retirement plan status) and tax deferral. The traditional IRA provides an immediate tax benefit and a deferral of income taxes, while the Roth version does not have an immediate tax benefit but provides tax free withdrawals.