By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
Retirement Ready? Strategies for Military Families was offered in November Included in the Nov. 1 session was a segment about personal finances and tax-deferred retirement savings plans that are available to military families.
Here is a summary of these plans:
- IRA- An Individual Retirement Account enables workers with earned income (i.e., salary from a job or net earnings from self-employment) to invest for retirement. IRAs are not an investment, per se, but, rather, a special classification for tax purposes.
The actual investment will be in different types of securities such as stocks, bonds, certificates of deposit, or mutual funds.
Arrangements to open an IRA account are made with a financial institution such as a bank, brokerage firm, or mutual fund.
- myRA (now ended) A Roth IRA that invests in a new U.S. Treasury savings bond that earns interest at the same rate as investments in the Thrift Savings Plan (TSP) Government Securities (G) Fund available to service members and federal government employees. Workers can transfer a myRA account balance into a private sector Roth IRA at any time.
When myRA balances reach $15,000 or accounts have had a lower balance for 30 years, they will also be transferred to a private sector Roth IRA. myRAs were especially designed for workers who don’t have access to a retirement savings plan at work but can also be used by other workers. Deposits can be made from a worker’s paycheck, from a checking or savings account, or with a federal income tax refund.
- Retirement Savings Plans for the Self-Employed- Can be set up by workers who are self-employed as a whole source of income and those who engage in freelance work in addition to their “day job.”
Options include a simplified employee pension or SEP, SIMPLE plans, and Keogh plans. SEPS are often used by freelancers and sole proprietors and are the least complicated account to administer.
- Employer Salary Reduction Plans- Many employers offer defined contribution plans, such as 401(k)s, where employees voluntarily reduce their salary by a specific dollar amount (generally, a percentage of gross income) which is set aside for retirement.
When it’s time to retire, workers have available the amount they have saved, plus or minus earnings (or losses) on their selected investments. The account balance is portable and can be taken when employees leave a job and rolled over into an IRA or a new employer’s retirement savings plan.
Available savings plans include the Thrift Savings Plan (TSP) for service members and federal government workers, 401(k) plans for employees of for-profit corporations, 403(b) plans for public and private school and non-profit employees, and 457 plans for state and local government workers. 2016 maximum contributions are to $18,000 (24,000 for those who are age 50 or older before the end of the year). Unlike IRAs, the “menu” of investment options for employer retirement savings plans is limited to securities selected by the employer or the employer’s retirement plan provider. Therefore, investment advisors often recommend balancing investments that are selected within tax-deferred plans with different types of investments that are held in IRAs and/or taxable accounts.
Don’t let the large annual maximum contribution limit numbers scare you. The required minimum can be as low as 1% of a worker’s pay or a small amount such as $10 per paycheck. Simply save whatever you can, subject to minimum deposit amounts required by a plan custodian. Any savings is better than no savings!
Minimum deposits required to set up an IRA vary with the financial institution and type of investment. A bank may require $500 to purchase a CD for an IRA and a mutual fund may require a $1,000 minimum deposit or higher.
Make the most of tax-deferred investments by saving as much as you can and assembling a well-diversified portfolio that includes different asset classes (e.g., stocks, bonds, and cash assets). Want to know more about investments available for retirement savings? Visit Investing for Your Future