tax deferral

Hammer or Pliers?

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Recently a client asked us a common question. With a little room in the budget, should more money be added to retirement savings, or a regular investment account? Which one is better?

Of course, the answer depends on the situation. In the early and middle career stages, one might not put funds to be used before retirement into a retirement account. Saving for intermediate term goals like buying or trading homes, or buying a boat or camper, perhaps should be done outside of a retirement account.

But getting it down to fine points, some retirement plans have provisions for using money before retirement without penalty. We believe you can gain an edge by paying attention to the fine points. We like to outline all the alternatives so you can make a good decision.

On the other hand, money to be devoted to growing the orchard – a pool of capital that you may someday live on – should almost always be sheltered from taxes, if possible. This typically means into some form of retirement plan. The tax advantages may make a big difference over the years and decades ahead.

And retirement plans come in different flavors. Individual retirement accounts, employer plans of various kinds, Roth… there are many options.

Just as one cannot know whether the better tool is a hammer or a pair of pliers, one cannot know the best way to invest without understanding the job the money is supposed to do for you. That’s why we talk back and forth! You ask us things about our area of expertise, we ask you things about yours. A meeting of the minds is just the thing to make progress, with a collaborative process.

Clients, if you would like to talk about this (or anything else), please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

 

Working? Here’s Some Basics.

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What has been the biggest factor in helping people end up financially sound in retirement?

In our opinion, it is the availability of retirement plans in the workplace. This article is a primer on the high points. If you are on the job, this may be key information for you.

Employer-sponsored retirement plans have a number of features that may help people build wealth. They go by different names (401k, SEP, SIMPLE, 457, TSA, 403b etc.) but generally share these features:

1. Once you sign up, you invest automatically every payday. It takes no effort or thought month to month—you put your asset-building on autopilot when you enroll.

2. The arithmetic of pre-tax retirement plans can be compelling. For some, for every $5 they contribute, their paychecks may only go down by $4. Taxable income goes down, so your income taxes go down. A potential tax break for the working person—imagine!

3. Some employers match your contributions to some extent. A fifty-cents on the dollar match means if you put in $5, your employer will add $2.50. That’s like a 50% return on Day One! (Employer contributions may be subject to vesting, so you might not keep the whole match unless you stay on the job for up to five years, for example.)

We are always happy to talk to you about your situation, and how you might use an employer plan to get you where you want to go. But here are a couple of rules of thumb. These are general pointers that may or may not fit you, but some have found them useful:

First, saving 10% of everything you ever make is a good way to start on a sound retirement. If you aren’t there and cannot contribute that much, ratchet up your savings rate by 1% a year if you can—every year. Some clients make a habit of putting raises (or half of them) into the plan, or increasing their contribution rate by 1% per year.

Second, if you are a long way from retirement, you can afford to take a long view with the investments you choose for the plan. Why take a short term view on money you probably won’t spend for many years, or even decades? But the choice is yours—most plans give you options.

Clients, call or email if you would like to talk about your situation or any other pertinent topic.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.