With retirement on the horizon for many in Boulder, many investors want to ramp up retirement savings. Often times, the thought is to ‘max out’ a tax deferred or a tax-free savings account. Simply wanting to ‘max out’ savings for retirement might mean putting more money aside than anticipated. The ‘max’ often can mean different amounts and account types for each investor. For some investors, the ‘max’ means saving up to the maximum an employer will match in a 401(k) while for others it means contributing the maximum to an IRA or Roth IRA. For others still, it means contributing the maximum to their employer 401(k); or saving $55.5K in an individual 401(k); or saving the maximum for self-employed person in a defined benefit plan which can be as high as $200K. There are many different types of accounts that provide tax advantaged savings for retirement, often with more than one account type being used in a year. The best way t o understand what the ‘maximum’ is for an individual and/or couple is to look at some different scenarios. These scenarios are based on the 2012 limits.
Scenario #1 –
A 52-year-old earning $100,000 per year at a company, with a spouse that is 48 years old and earns $50,000 per year working for a company. Both of their companies provide a 401(k) plan.
The spouse earning $100,000 can contribute $22,500 to the 401(k) at work. $17,000 of this is employee deferral and $5,500 is a catch-up contribution which is available to employees age 50 and older. The second spouse who is earning $50,000 can contribute $17,000 to the 401(k) plan at work.
If either of their employers offered a Roth 401(k), each spouse could contribute $22,500 and $17,000 respectively to a Roth 401(k) instead of a Traditional 401(k).
In addition to the 401(k) plan savings each year, each spouse can contribute $6,000 (for 50 and above) and $5,000 (for 49 and below) to an IRA or possibly a Roth IRA depending on total adjusted gross income.
Between the 401(k) and IRA savings, this couple could save $50,500 annually or over 33% of income in tax deferred or tax-free vehicles each year.
Scenario #2 –
A 52-year-old working for a company earning $100,000 per year and has a 401(k) through work and has a spouse that is 48 years old and earns $100,000 in W2 income from self employment work and takes $100,000 in distributions.
The spouse earning $100,000 at a company can contribute $22,500 to their 401(k) (same as scenario 1). The 48 yr old spouse who is earning $100,000 in W2 income can set up an individual 401(k) and contribute $17,000 and 25% of salary or $25,000 in profit-sharing. Just like scenario #1, they can each contribute $6,000 & $5,000 to their IRA or Roth IRA (provided they meet the income qualifications). The self-employed spouse could also set up a defined benefit plan with annual contributions of about $57,000 in addition to the individual 401(k) plan contributions of $17,000. The profit-sharing contribution above would have to be reduced to 6% of salary or $6,000 from the 25% of salary or $25,000. The total tax deferred or tax-free contributions could be as high as $75,500 or an additional $38,000 of savings per year if they were to set up a defined benefit plan bringing the couple’s annual total contributions to $113,500.
University of Colorado, Boulder professor who does consulting & spouse who is self-employed
Scenario #3 –
A 52-year-old professor working for the University and is earning $100,000 from salary and $100,000 from consulting and takes $100,000 in distributions from the consulting practice and a spouse that is 52 years old and earns $100,000 in W2 income from self employment work and takes $100,000 in distributions.
The University of Colorado offers different retirement plans than private employers do. The 52-year-old professor can participate in both a 403(b) and a 457 plan contributing a total of $45,000 ($22,500 to each plan if over 50) and if the professor is within 3 years of retirement the limit for the 457 plan goes up to $34,000 ($11,500 more). Since the professor does consulting on the side and earns $100,000 in W2 income from consulting they could contribute another $87,000 to a defined benefit plan. The second spouse who is 52 and has $100,000 in self employment income can contribute about $87,000 to a defined benefit plan, $22,500 to a 401(k) and $6,000 in profit-sharing. Finally, each can contribute $6,000 to an IRA. The total contribution for this couple could be around $259,000. Click here< /span> to get the retirement plan sheet from the University of Colorado.
Scenario #4 –
A 60-year-old working for a company earning $150,000 per year and has a 401(k) through work, with a spouse that is 60 years old and earns $200,000 in W2 income from self employment work and takes $170,000 in distributions for additional compensation.
The 60-year-old spouse who is working from a company will be able to contribute $22,500 to their 401(k). The 60 yr old spouse who is self-employed will be able to contribute up to $152,000 to a defined benefit plan + $22,500 to an individual 401(k) and 6% of salary or $12,000 to the individual 401(k). Additionally, each can contribute $6,000 to an IRA. The total contribution for this couple could be around $221,000.
As you can see from the above scenarios, when someone says they want to save the ‘maximum’ for retirement, that number changes in each scenario and has the potential to be a very high number. There are many different types of retirement accounts that can be applied to a particular scenario. With all of the facets to saving for retirement, it is important to begin your retirement planning early and to engage the services of a qualified wealth manager.
*Note that the Roth 401(k) option is available for most 401(k) plans and most self-employed 401(k) plans. It is not available for a defined benefit plan. The contributions to a 401(k) plan are tax-deductible and the same for the contributions to a defined benefit plan but any person setting up a retirement plan should consult their tax advisor and this not considered tax advice. All examples are based on the 2012 limits and on our best estimates.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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