Wealth Watch / Maximizing retirement savings
A traditional IRA can be used by anyone under age 70 1/2 with earned income. Contributions of $5,500 for 2014 ($6,500 for age 50 and over) are allowed. Your IRA contributions may be tax-deductible, depending on the amount of your income and your participation in other retirement plans. Don't forget that a non-working spouse can contribute to an IRA as well.
Roth IRAs are similar to traditional IRAs with a few important differences. While contribution levels are the same, contributions are never deductible and eligibility is limited to those below certain income levels (contributions are phased out between $114,000 and $129,000 for filing single, and between $181,000 and $191,000 for married filing jointly). Eligibility is not affected by participation in an employer-sponsored retirement plan, and contributions by individuals with earned income may continue after age 70 1/2. What's more, with a Roth IRA, withdrawals are not required and are tax free in many circumstances.
Employer sponsored plans
A 401(k) is an employer-sponsored qualified defined contribution plan that allows participants to make elective deferrals of up to $17,500 in 2014 ($23,000 if over age 50). Many companies match participant contributions, making this a very compelling plan. Be sure to understand your company's plan specifics, such as the vesting schedule.
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Are you self-employed?
If you are self-employed or own a small business, you have some attractive retirement savings options:
One-participant 401(k), or solo 401(k), is ideal if you own a business and you (or your spouse and you) are the only employee(s). Since the business owner wears two hats (employer and employee), contributions consist of two parts: the elective employee deferral of up to $17,500 for 2014 ($23,000 if over age 50), and an employer contribution up to 25 percent of earned income. (See IRS.gov for definition of earned income.) There's an overall cap for all contributions of $52,000 ($57,500 if over age 50) for 2014. Note that this plan needs to be established by December 31st of the year for which contributions are made.
Simplified Employee Pension Plan, or SEP-IRA, is another plan designed specifically for self-employed individuals and small business owners. Annual SEP contributions made by the employer on behalf of the employee are limited to the lesser of 25 percent of compensation or $52,000 for 2014. All eligible participants must receive the same percentage of compensation contribution. And, contribution limits for self-employed owners vary and are based on earned income multiplied by a reduced plan contribution rate.
If a company has fewer than 100 employees, earning at least $5,000 annually, it is eligible to set up a Simple IRA for employees. The amount the employee contributes to a Simple IRA cannot exceed $12,000 in 2014 and is subject to further limits if the employee contributes to any other employer plan. The employer can make matching contributions up to 3 percent of a participating employee's compensation or non-elective contributions up to 2 percent of an eligible employee's compensation instead.
Retirement account contributions can be complicated and consultation with a tax adviser is well-advised.
Allison Donaldson is an investment adviser with HTG Investment Advisors, an independent fee-only advisory firm in New Canaan. For more information, call 203-972-8262 or visit www.htginvestmentadvisors.com.