Could you be making a huge mistake in your financial life and not even know it? Life is busy and when we aren’t paying attention, things creep up and we go from time being on our side to missed opportunities.
One area where this can be very costly is retirement planning. The results could range from inconvenient to catastrophic depending on how long you ignore things.
Saving for retirement is more than just putting aside a percentage of your income, it’s being intentional and reviewing your plan as well. In this article we will talk about some of the things you can be doing, and pitfalls to avoid when planning for retirement.
Plans and Opportunities
When it comes to retirement, there are many plans out there, ranging from a work plan to a business-owner plan to an IRA and everything in between. It would be easier if the contribution levels to each of these plans were the same, but they are not. If you work for a company that provides a 401(k) plan, you can likely put away $24,500. If you are age 50 or over, you can put in an additional catch-up contribution and if you are age 60-63, your catch up contribution is $11,250 instead of $8,000. Does that sound confusing?
Well, if your employer doesn’t provide a plan, you may still fund an IRA or Roth, but your maximum is $7,500 per year and the catch-up and super catch-up amounts allowed under these plans are much less than what the company plans offer. Additionally, you can only deduct IRA contributions if you make under a certain amount, and you may not qualify to contribute to a Roth IRA.
These rules make it difficult to know if you are doing the right thing and if you are saving enough.
Investment Choices
Depending on what plan you have for retirement, you may have different investment choices available to you. Your 401(k) plan might offer 10–12 different funds that you can pick from. Many people don’t know what to pick and end up in the default target date.
While this may be a suitable choice for many, it may not take into consideration your growth and risk profiles. Are the investment choices expensive, and does your employer pay the fees or does it come from your investment returns? These are areas that people generally aren’t familiar with and sometimes need the help of an advisor to determine.
Maxing Out Contributions
Many tell me that they are maxing out their 401(k) contributions, but that concept is misunderstood. If your company matches your contributions up to 6% of your salary, you may think that putting in 6% is maxing out your contributions, but it may be the minimum you want to contribute. If you make $100,000 and you are contributing 6%, you are putting away $6,000 and perhaps your employer is contributing another $3,000 to $6,000 on your behalf. You may be able to contribute 24.5% or even more depending on your age. If you contribute 6% you may not be putting away enough to support your future lifestyle.
If one spouse stays at home or doesn’t have a work plan, are you putting money into an IRA for them? This could be another opportunity to save more and even get a tax deduction.
Potential Pitfalls
There are many IRS rules that govern how much you can put away and what accounts you can put the money into. If you aren’t careful, it is possible to go over allowable limits or contribute to a Roth IRA when it isn’t allowable. I’ve even seen clients at larger firms put after-tax dollars above the IRS tax deductible limits into their account and leave them there, missing a Roth conversion opportunity that could save them taxes in the future.
Consider your tax picture to determine which accounts make the most sense to fund currently to pay the least amount of tax over your lifetime.
Understanding your retirement-funding options is an important step toward preparing for the future. Knowing which accounts to use, how much to contribute, and how to coordinate your savings with taxes, investments, and protection strategies can make a meaningful difference.
At Red Barn Financial, we help individuals and families develop a comprehensive financial plan aligned with their goals, values, and vision for the future. If you’d like to review your retirement savings strategy, let’s start a conversation.
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Disclaimer: This article is for informational purposes only and is not tax, legal or financial advice. Everyone’s situation is different, so consult a financial advisor. If you would like to connect with me, please call 615-619-6919 or email me at smoran@redbarnfinancial.com. Learn more at redbarnfinancial.com.
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Photo, top, courtesy of Joslyn Pickens / Pexels
