Retirement programs can be overwhelming at any age, but as you near retirement, wading through the details can cause worry and anxiety. Starting a retirement program as early as possible can assuage those worries. Experts recommend that people as young as 25 begin their own retirement programs to prepare for the future. Factors like inflation and longer life expectancy mean that people need to save more than ever to live comfortably in their retired years, and retirement programs are excellent guides to ensuring you have enough saved to accomplish your goals.
The four primary categories of retirement programs are government-sponsored plans like Social Security, personal plans like IRAs, annuities through insurance companies and employer-sponsored plans. These days, finding a job with retirement benefits is almost as good as an extra paycheck. Young people beginning to save now can get a start on their personal plans with high-risk, high-return investments like stocks and gradually transition to safer vehicles as they age. Developing a workable strategy with the help of a financial advisor can give you the peace of mind that aggressive saving and strategic investments will pay off when you are ready to retire.
Benefits from Employers
Most employer-sponsored retirement programs are tax-qualified, which means they meet the Internal Revenue Code requirements and the Employee Retirement Security Income Act of 1974 requirements. Qualified plans carry several tax benefits for employers, and these serve as incentives for employers to offer these benefits. Contributions and earnings on these accounts are tax-deferred, so you do not pay taxes on them until you begin to withdraw.
Public education employees and employees of certain tax-exempt institutions are eligible for a 403(b). The limit on contributions is the lesser of 100 percent of salary or some annual limit ($50,000 for 2012). People over 50 are allowed to make catch-up contributions to their accounts, and they must have worked for the institution for at least 15 years to make catch-up contributions to their 403(b) programs. A 403(b) is funded by elective deferrals, pre-tax compensation set aside for retirement programs at the preference of the employee.
All employers can choose to provide a 401(a) defined benefit or defined contribution account. Neither allow catch-up contributions. Defined benefit plans calculate retired benefits based on average high salary and years of service, and defined contribution programs set aside a predetermined amount each year for retired benefits. Both carry restrictions about withdrawals. A pension is an example of a defined-benefit plan, and profit sharing or stock options fall under the defined contributions umbrella.
One of the most recognized programs is a 401(k). All non-government employees, as well as some government employees grandfathered in in 1986, are eligible. Like a 403(b) and the two forms of 401(a), contributions are based on compensation. Employees may make catch-up contributions with annual restrictions. Post-retirement contributions are not admissible.
Managing Programs When You Retire
Retirement programs are fraught with limits and restrictions, and they do not go away once you retire. Some accounts hold strict guidelines for when retirees can tap them and how much they can withdraw annually, not to mention the inclusion of this tax-deferred income on your income taxes. When you initially search for a financial advisor, find one who not only specialized in investing, but who can also help with accountancy.
The IRS penalized withdrawals from most accounts before the age of 59 and a half. These days, retiring before 70 is becoming a pipe dream, but keep in mind these restrictions to avoid any penalties. Every retiree should have three tiers of funds to draw from to avoid penalties and prolong the lifespan of your savings. The first step is to draw from an emergency savings fund, which should hold two to three years of living expenses, followed by investment accounts, and retirement accounts must be tapped last.
Traditional, SEP and SIMPLE IRA account holders, as well as those with qualified programs, are held to required minimum distributions (RMD). RMD requires account holders to make a certain withdrawal by April 1 of the year they turn 70 and a half, and they must be distributed each subsequent year. Make sure your retirement assets are liquid enough to make the required RMD to avoid penalties.
Managing your programs is certainly tied to managing your retired income. The benefits of retirement programs do not last forever, so careful financial planning continues well into the retired years. When you list all of your expenses and your assets, you may find that you fall short of your goals. Consult a financial advisor to take the steps to maximize the potential of your retirement programs, whether that means deferring withdrawals, withdrawing less or managing your assets with debt consolidation or property refinancing. Use our website to find financial planners in your area to get started meeting your goals.