Published on March 26th, 2014
I am often asked by my clients, will it help me to save by putting money into an IRA or Roth IRA? Before we can answer that question, we must first determine whether they are eligible to contribute based on age, employer plan coverage, spouse’s coverage, and income. Often the very people who have sufficient income so that they can afford to save in an IRA find they are restricted from contributing due to those very higher earnings. To those we say, maximize savings by maximizing your employer sponsored plans.
There are many forms of employer sponsored plans. Two basic programs are 401k and 403b plans (named for sections of the Internal Revenue Code). Employees contribute to their retirement account, reducing their take home pay and the amount of pay on which they pay income taxes. The tax savings makes it easier to save. At a 40% tax rate, a $10,000 contribution to a 401k or 403b plan saves $4,000 of tax in the year of contribution, so if feels like only $6,000 is “tied up” to save $10,000.
Employee contribution must be made during the tax years, unlike an IRA contributions that can be made after year end – so it’s important to plan and budget. All withdrawals are subject to tax, similar to an IRA. The amounts an employee may contribute are generally larger than IRA.
These plans often have benefits not found under IRA’s and Roth IRA’s plans. Employers often add an incentive for employee savings by contributing to an employees account. Employers may set up the plan so an employee may borrow from the account in time of need.
We recommend 401k, pension plans, and SEP’s, as powerful savings tools for individuals and business owners. For business owners, certain contributions can be made after year end, compounding the benefits. Properly planned and used on an ongoing basis, the benefits and flexibility they offer a small business owner are difficult to match.
Keep in mind that retirement savings impacts and must be comprehensively considered in Estate Planning, Elder Law / Medicaid Planning, and Asset Protection Planning.
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The content in this document is provided for informational purposes only, and should not be construed as legal advice or an offer to perform services on this subject matter. Contact Visci & Associates to schedule a consultation at our offices in New York and New Jersey.