The Sun News

GOSS: Use your retirement plan

This article is the third in a series that will help you answer the question, “Can I afford to retire?” In January I encouraged you to set goals and track spending for 30 days. Last month, I explained why you need to be debt-free in retirement.

This month I want to talk about the benefits of retirement plans, and the different types. If you work at Robins Air Force Base, you have access to a Thrift Savings Account. If you work for a nonprofit, you may have access to a 403(b) plan. If you work for a corporation, you probably have a 401(k). What many people do not know is that you can max out your employer’s retirement plan (for 2015 the cap is $18,000 plus a $6,000 catch-up for persons age 50 or older).

The next types of retirement plans are usually used for small businesses and self-employed persons. They include the Simple and SEP IRA, and the Individual 401(k). Each of these accounts has different caps on what you can contribute, and some are based on your income.

What many people do not know, is you can have a retirement plan and also possibly contribute to a Roth IRA. Roth IRAs are funded with after-tax money, and the investments grow tax-deferred. The only catch is there is an income phaseout that determines whether you can contribute to one.

People will ask me whether they should contribute to their retirement plan or a Roth IRA, and I usually advise that they contribute to the retirement plan. The reason is that contributions to retirement plans are taken out pre-tax. Roth IRAs are funded with after-tax dollars. I’ll use a 401(k) as an example. Let’s say you contribute $100 per month to your 401k. Because that contribution comes out of your pay pre-tax, you will see a reduction in your pay of about $75. So, you just made $25 by contributing. If you get an employer match, your situation is even better. Next, the assets inside the plan grow tax-deferred, which is huge. And, when you retire you can roll that plan over into an IRA, pay no tax, and your account can continue to grow tax-deferred for the rest of your life. The only taxable distributions you’ll have to take are the Required Minimum Distributions at age 70½ and beyond.

If you do not have access to a retirement plan through your work, you can invest in a traditional or Roth IRA. The maximum contributions for 2015 are $5,500 with an annual “catch-up” for persons age 50 and older of $1,000 per year.

Let’s say you are 25 years old, and you begin contributing $100 per month to your employer’s retirement plan. I used the calculator on www.bankrate.com and at age 62, if you earned an average of 5 percent per year, you would end up with more than $128,000. If you earned an average of 7 percent, you’d end up with more than $210,000. The earlier you start and the more you can save, the more prepared you’ll be for retirement.

Sherri Goss is V.P. of Rosenberg Financial Group, Inc., with offices in Macon and Warner Robins. You can reach her by calling 922-8100, or via email at sherri@rfmoney.com.

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