Week 4 – Saving for Retirement

Employer-based Retirement Savings

Depending on the era you were born, retirement savings has evolved. It’s likely your parents had a pension to rely on. All of mine do, and I’m so thankful for that. A pension combined with Social Security and you can practically guarantee a level of comfort.

The world shifted in 1978 when the 401(k) was established. The number 401(k) refers to the tax code added to allow individuals to start saving money before tax for their retirement. The onus shifted from an employer saving for an employee’s future to the employee saving for their own future. Pensions started to dwindle as employers shifted the burden. It made sense, jobs were becoming more fluid, and most people were not staying at one company for their whole career. It was becoming more difficult for employees to vest in a pension plan.

The 401(k) plan is typically the number one retirement savings vessel for employees. If you work for a company of any size, this plan is likely available to you. I’m a big fan. Conventional wisdom says save enough to ensure you get the employer match. I say – the match is awesome; it’s like free money, but save the maximum amount you can afford.

Most plans have a limit on the percentage you can contribute to a 401(k) – this is plan specific, so find out what that is for your plan. From the tax code perspective – it can’t be more than 100% of your pay or $19,500. The maximum amount changes each year. If you are age 50 or older, you can contribute an additional $6,500 in 2021. This is referred to as a catch-up contribution.

An example – you are single and earn $100,000. Your employer matches 50% of your contributions up to 6%. The plan limit is 15%.

$100,000 x 15% = $15,000 contributed by you – Net Gross Income is now $85,000. Your income tax bill just shrunk.

$100,000 x 6% = $6,000 x 50% = $3,000 employer contribution.

Total contributed to 401(k) = $18,000 Total saved in federal taxes = $3,302

That’s an over $20,000 improvement in your financial situation in a single year. Yep, I’m a big fan of 401(k) plans.

Best advice: Contribute as much as you are allowed to a 401(k) plan. It reduces your taxes, grows tax-deferred, and will likely be your highest source of savings. If you can’t afford the maximum percentage allowed, pick a reasonable percentage but no less than your employer’s match and then increase the rate each time you get a raise until you reach the maximum.

What if you don’t have an employer?

A 401(k) is still available to you if you are self-employed. There are more factors to consider, but I recommend implementing a 401(k) plan for your company. It is a great perk for employees, and the employer contribution is always discretionary. If you don’t have employees except for your spouse, you can open a Solo 401(k) Plan. I use Safeguard Advisors for my 401(k) plan, there is an initial set-up fee and an annual fee to the legal team to keep your plan in compliance, but I have found this to be a great investment vehicle.

As a solo 401(k) plan, you have higher contribution limits than a traditional plan based on the earnings in your company. This is impacted by the type of entity you hold your company as – sole proprietor, LLC, S Corp, or C Corp. Check out www.ira123.com for more information. If you’d like a referral, email me at shelley@shelleykrehbiel.com

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