10 Retirement Saving Strategies You Should Know About

Posted by on Feb 23, 2016 in Articles, Uncategorized

From tax-deferrals to employer contributions, here’s how to save more.

We all know that we should be putting aside a portion of each paycheck for retirement. Setting up a direct deposit to a savings or investment account can help make sure that we don’t forget to save every month. However, once you start saving, there are many other things you can do to help grow and protect your nest egg. Here are 10 savings strategies that will help you build wealth for retirement.

Tax-deferral on retirement savings. You can defer paying income tax on money you save for retirement in a 401(k) (up to $18,000) and IRA (up to $5,500). Workers age 50 and older can temporarily exclude from tax an additional $1,000 in an IRA and $6,000 in a 401(k). Income tax won’t be due on this money until you withdraw it from the account. And if you will be in a lower tax bracket in retirement, you can reduce your lifetime tax bill by saving in traditional retirement accounts.

Set up tax-free retirement income. You have already paid the income tax on money you contribute to a Roth IRA and Roth 401(k). The money will accrue without taxes while in the account, and if you take distributions after age 59 1/2 from an account that is at least 5 years old, you won’t ever have to pay tax on the investment earnings. “If you put the money into a Roth and pay taxes now, then the money that you gain is tax-free,” says Austin Chinn, a certified financial planner for Fountain Strategies in San Jose, California.

The myRA. A new type of Roth retirement account, the myRA, guarantees that your savings will never decline in value. The only investment option is a Treasury savings bond that pays a variable interest rate. However, when investors accumulate $15,000 or the account turns 30 years old, your savings will be transferred to a private sector Roth IRA.

The saver’s credit. Retirement savers whose adjusted gross income is less than $30,750 for individuals and $61,500 for couples in 2016 could qualify for the saver’s credit. This tax credit is worth between 10 and 50 percent of the amount you contribute to a 401(k), IRA or Roth account up to $2,000 for individuals and $4,000 for couples.

Trustee-to-trustee transfers. If you decide to roll over your 401(k) to an IRA or a new 401(k) when you change jobs, take care to transfer your balance directly from one account to another via a trustee-to-trustee transfer. If a check is cut to you, 20 percent of your savings will be withheld for income tax. You only get 60 days to put the distribution, including the withheld 20 percent, in a new retirement account. If you don’t meet the deadline you will owe income tax and potentially an early-withdrawal penalty on any amount that doesn’t make it into another retirement account. A trustee-to-trustee transfer allows you to avoid the tax withholding and the potential to trigger taxes and fees. “You want to do a trustee-to-trustee transfer and have the check going to the new custodian directly, so that way you can avoid that withholding,” says Mary Erl, a certified financial planner for Nest Builder Financial Advisors in Gurnee, Illinois.

Tax-free IRA charitable contributions. Withdrawals from traditional IRAs are required after age 70 1/2, and income tax is typically due on each distribution. However, retirees who are 70 1/2 or older can avoid the tax and fulfill their withdrawal requirement by directly transferring amounts of up to $100,000 from their IRA to a qualified charity.

Holding tax-preferred investments outside retirement accounts. Some types of investments receive preferential tax treatment. For example, long-term capital gains are taxed at a lower rate than short-term gains and ordinary income. If you put investments that generate long-term capital gains in a traditional 401(k) or IRA, you won’t have to pay tax on it while it’s in the account, but you will owe ordinary income tax on the investment gains when you withdraw them from the account. “You pay regular income tax on the gains, not capital gains tax on the gains,” Chinn says.

Directly deposit your tax refund to an IRA. Saving part of windfalls for retirement, including your tax refund, can help grow your retirement savings faster. You can have part or all of your tax refund directly deposited into a traditional IRA, Roth IRA or myRA using IRS Form 8888.

Get and keep employer contributions. Find out how much you need to save to get any 401(k) match your employer is offering. It’s equally important to take a look at your company’s vesting schedule to see if there are any job tenure requirements before you can take the 401(k) match with you when you leave your job. “Consider if you have a vesting schedule,” says Samantha Fraelich-Rohe, a certified financial planner for IntegriGen Wealth Management in Rockville, Maryland. “If you are not 100 percent vested, you might want to wait.”

Find low-cost funds. The expense ratio and other investment fees reduce the returns you earn on your investments. Investing in lower cost funds can help improve your portfolio’s performance. “Look for the low-cost funds that will fit how you want to allocate your account,” says Maureen Poplaski, a certified financial planner for Lighthouse Financial Management in Westerly, Rhode Island. Take a look at your annual 401(k) fee disclosure statement to help identify the lowest cost funds in your 401(k) plan, and remember to take into account the expense ratio and other charges when selecting funds.