Personal Finance: Retirement savings option beyond the 401(k)

Personal Finance: Retirement savings option beyond the 401(k)

March 15th, 2017 by Christopher Hopkins in Business Around the Region

It is well known that Americans are not saving enough money for retirement in their employer-sponsored plans. But what if you don't have access to a 401(k) or other work-based option? In this case the task is even more daunting, and demands familiarity with alternatives to help save for a more secure retirement.

Christopher Hopkins

Christopher Hopkins

Photo by Contributed Photo /Times Free Press.

Probably the most recognized option is the traditional Individual Retirement Arrangement or IRA. In its purest form, the IRA allows savers to make tax-deductible contributions each year into an account that grows tax-deferred until retirement distributions begin after attaining age 59 1/2. Account holders then decide when and in what amounts to withdraw funds which are then taxable as ordinary income. Beginning at age 70 1/2, the IRS requires that at least a Required Minimum Distribution (RMD) be withdrawn each year aimed at fully depleting the account over your statistical lifetime. Any residual value in the account may be left to designated beneficiaries.

You may contribute up to $5,500 per year ($6,500 if you are at least 50 years old), fully tax-deductible if you do not have access to a plan at work. If you do have a work plan, your tax deduction phases out above certain income levels.

What about spouses who do not work outside the home? They also may make deductible contributions (up to the same limits) into their own IRA account, even if they have no taxable income. If the working spouse has an employer plan, the spousal deduction phases out above certain income thresholds ($186,000 for married filing jointly).

IRA accounts are essentially regular brokerage or bank accounts but carry a tax shield that allows deferral of income taxes until withdrawal. Savings may be invested in virtually any publicly traded security like stocks, bonds, mutual funds and ETFs at the discretion of the account owner. Alternative assets like real estate and gold may be held as well but require a specialized custodian and must follow strict rules. Still, the possibilities are nearly endless.

Another option worth considering, especially for younger taxpayers just getting started, is the Roth IRA. Created in 1997, this variant only accepts after-tax contributions (no tax deduction), but allows the earnings to grow tax-free, subject to a few simple restrictions. That means you may withdraw investment gains after age 59 1/2 with no tax liability whatever if the account has been funded for at least five years. This could be substantial over a 30- to 40-year investment horizon. And the Roth IRA does not dictate mandatory withdrawals, so that the assets may be passed tax-free to the next generation if not required during retirement.

The same contribution limits apply ($5,500 plus the $1,000 catch-up beyond age 50), but income thresholds constrain contributions ($186,000 for married taxpayers filing jointly). One additional benefit is the ability to remove any of the after-tax contributions regardless of age without penalty, increasing the flexibility of the account and encouraging larger contributions in the earlier years.

The best way to save for retirement is through regular automatic deductions. Employer-sponsored defined contribution plans utilize payroll deduction, but savers with no work option should replicate the idea. Consider a payroll deduction directed toward your IRA account each pay period to automate the process. If that is not feasible, you can establish a regular automated transfer from your bank account into your traditional or Roth IRA account. Just be sure to limit your annual contribution to the legal maximum to avoid penalties.

Starting early and saving systematically is the key to a successful retirement. Without an employer plan, IRAs are essential tools to help get the job done.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.

Getting Started/Comments Policy

Getting started

  1. 1. If you frequently comment on news websites then you may already have a Disqus account. If so, click the "Login" button at the top right of the comment widget and choose whether you'd rather log in with Facebook, Twitter, Google, or a Disqus account.
  2. 2. If you've forgotten your password, Disqus will email you a link that will allow you to create a new one. Easy!
  3. 3. If you're not a member yet, Disqus will go ahead and register you. It's seamless and takes about 10 seconds.
  4. 4. To register, either go through the login process or just click in the box that says "join the discussion," type your comment, and either choose a social media platform to log you in or create a Disqus account with your email address.
  5. 5. If you use Twitter, Facebook or Google to log in, you will need to stay logged into that platform in order to comment. If you create a Disqus account instead, you'll need to remember your Disqus password. Either way, you can change your display name if you'd rather not show off your real name.
  6. 6. Don't be a huge jerk or do anything illegal, and you'll be fine.

Chattanooga Times Free Press Comments Policy

The Chattanooga Times Free Press web sites include interactive areas in which users can express opinions and share ideas and information. We cannot and do not monitor all of the material submitted to the website. Additionally, we do not control, and are not responsible for, content submitted by users. By using the web sites, you may be exposed to content that you may find offensive, indecent, inaccurate, misleading, or otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of the Times Free Press web sites and any content on the Times Free Press web sites, including, but not limited to, whether you should rely on such content. Notwithstanding the foregoing, you acknowledge that we shall have the right (but not the obligation) to review any content that you have submitted to the Times Free Press, and to reject, delete, disable, or remove any content that we determine, in our sole discretion, (a) does not comply with the terms and conditions of this agreement; (b) might violate any law, infringe upon the rights of third parties, or subject us to liability for any reason; or (c) might adversely affect our public image, reputation or goodwill. Moreover, we reserve the right to reject, delete, disable, or remove any content at any time, for the reasons set forth above, for any other reason, or for no reason. If you believe that any content on any of the Times Free Press websites infringes upon any copyrights that you own, please contact us pursuant to the procedures outlined in the Digital Millennium Copyright Act (Title 17 U.S.C. § 512) at the following address:

Copyright Agent
The Chattanooga Times Free Press
400 East 11th Street
Chattanooga, TN 37403
Phone: 423-757-6315
Email: webeditor@timesfreepress.com


Loading...