Have you ever noticed that you take great care of people, but if your money could talk, it might whine or complain? A seminar attendee laughed as we did the “dollar holler exercise.” She shared that her money would stomp its feet and yell, “I feel neglected!” That’s when “the money nanny” was born. Good retirement savings advice is like a nurturing nanny who gives your long-term plans a kind dose of discipline. It’s like a little money makeover for financial security down the road.
Almost any time is a good time to include smart, tax-deductible savings to your financial resolutions. Or perhaps you can give your current savings amount a raise. According to a Money magazine poll conducted recently, saving more money was a top financial goal.
Self-Employed choices: There are rules for funding qualified plans for employees when contributing to a retirement plan for yourself. Keep in mind there are penalties if you make withdrawals from most retirement plans before age 59 ½. Below are some of the most common plans for the self-employed that offer deductible contributions and tax-deferred growth (you don’t pay taxes on the earnings until you withdraw the money):
SEP. A Simplified Employee Pension (SEP) may be right for you if you are a solo practitioner with no employees. You can put away up to 25% of your net income, up to a set dollar limit that is periodically raised to keep pace with inflation. For 2010 and 2011, the annual contribution dollar limit for a SEP is $49,000.
SIMPLE. The annual contribution limit for 2010 and 2011 is $11,500 ($14,000 if you are 50 or older). SIMPLE stands for Savings Incentive Match Plan for Employees. It requires you to match employees’ contributions up to 3% of pay.
Salary Deferral Plans: If you are not self-employed, your employer may have a 457, 401(k), or 403(b)plan in which you can participate. For 2010 & 2011, the annual contribution limit is $16,500.
IRA: You don’t have to be self-employed to have an Independent Retirement Account (IRA). There are two kinds of IRAs, summarized below:
Traditional IRA: The maximum contribution for 2010 & 2011 is $5000. Deductibility of your IRA if you are a participant in a qualified retirement plan depends on your modified adjusted gross income (MAGI). Some IRAs are not deductible at all if income is too high, so be sure to assess that at decision and tax time. If you are 50 or older, you can put an additional $1000 into an IRA.
Roth IRA. While not tax-deductible, your money grows tax-free and withdrawals are tax-free in retirement. In 2010&11, the maximum contribution is $5000 ($6000 if you are 50 or older). Not all people are eligible for Roth IRAs, if their joint MAGI exceeds a certain amount.
Nifty 50. You may have noticed that the plans listed above have catch-up provisions if you are age 50 or older. So there are advantages to growing older! You can put more tax-deductible money away than the younger folks. Now, if you can just find the extra dollars to stash away.
There are many details around retirement plan provisions. Professional guidance from a qualified advisor who can help you consider all your options can be a big help. Even when you know which plan type fits you best for tax and income considerations, choosing the best investment mix is vital to the long-term performance of your accounts. Tax savings combined with good asset allocation makes a big difference in how your money grows over time.
When you take good care of your money now, it takes good care of you later. Don’t let anything cause you to procrastinate. Time can be your best ally when it comes to growing your money.
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Susan Zimmerman is also known as “the fiscal therapist” in her seminars about mindful planning. She is a Licensed Therapist & Chartered Financial Consultant who helps people achieve clarity and financial prosperity. Contact Susan or her partner, Steve Zimmerman, ChFC, CFP, for your plan advice.