Plan for Retirement

Ask anyone nearing or in retirement and they’ll tell you the future is closer than you think. That’s why the steps you take many years before retirement will shape your financial picture in retirement.

There are a variety of retirement savings vehicles to which you can contribute, depending on your employment situation, including traditional and Roth IRAs, Simplified Employee Pensions (SEPs), SIMPLE plans, and 401(k), 403(b), and 457 plans. Many of these plans enable you to reduce your taxable income by contributing before-tax funds.

Making tax-deductible contributions to a qualified retirement plan means that you don't have to pay tax on any interest or other gains the account earns until you withdraw the money. At minimum, if your employer offers matching contributions in a 401(k) contribute enough to receive the maximum match.

ROTH IRAS

Roth IRAs require after-tax contributions, but qualified distributions are tax-free and there are no required minimum distributions during your lifetime, unlike most other retirement accounts. However, if a withdrawal is made within five years of the first contribution it is not considered a qualified distribution in most cases.

Contributing to a Roth IRA makes sense if you do not need the tax deduction now. Roth IRAs can provide tax-free income before RMDs kick in, requiring you to take distributions from qualified retirement accounts.

This year, due to the lower tax rates, many people have rolled over their traditional IRAs to a Roth IRA to avoid paying higher tax rates in the future. This only makes sense for people with the liquidity to pay the tax bill due in April without tapping retirement funds. If you are in a higher tax bracket now and planning to retire soon, a rollover may not make sense for you.

When changing jobs, rollover any retirement funds directly into an IRA to avoid tax and potential early withdrawal penalties.