1. Start small and be consistent. Making small contributions can really add up over a lifetime. Make sure you contribute at least what your employer will match. Not doing that is the equivalent of not picking up money you see on the ground. Contributing only $100/month in a plan for 30 years would grow to a balance of approximately $58,400 (assuming 3% growth). Completely funding your IRA ($5,500/year below age 50) for 30 years would produce a balance of approximately $267,000. You do not have to have a lot of money to get started, the most important thing is to get started and make investing a habit. These are hypothetical examples and are not representative of any specific investment. Your results may vary.
2. Contribute at a higher tax bracket and make withdrawals at a lower tax bracket. Plan contributions frequently are deducted at a higher marginal tax rate during a person’s working years and withdrawn at a lower marginal tax rate during retirement. For example: A retirement contribution of $5,500 would defer $1,375 in federal taxes at a 25% marginal tax bracket ($5,500x.25=$1,375). At a retirement tax bracket of 15%, $825 in federal taxes would be payable ($5,500x.15=$825). The difference between $1,375 and $825 is $550 which is the differential savings in taxes. Furthermore, those tax savings were available to make more money on over that time. This is an important feature of using a retirement plan to accumulate investments. This is a hypothetical example and is not representative of any specific investment. Your results may vary.
3. Sell appreciated assets in your retirement plan. Gains are not taxed when they are realized within a retirement plan. Assume you purchased a stock and it doubled in price over time. You will be able to sell all or part of that stock without paying any taxes. All of the proceeds can then be used to make another investment. Taxes are only paid on your retirement assets when you remove money completely from the plan.
4. Reinvest all dividend and income generating investments in your retirement plan. This will have the effect of systematically adding to your investments and creating a compounding growth effect. As your positions grow over the years so will the dividends and interest your investment pays.
Remember that the time to start your retirement plan is today. Regardless of your financial situation, starting with a small contribution will build your savings habit. Increase the amount of your contribution each time your salary increases. Time passes quickly and you will only have at retirement what you send ahead through regular participation.
The author of this article, George S. Urist, MBA, CFP® is President and Owner of Urist Financial and Retirement Planning, Inc., located in East Syracuse, New York. George Urist has been a CERTIFIED FINANCIAL PLANNER™ practitioner and Registered Representative with LPL Financial for over 28 years. George can be followed on twitter @gurist and can be reached at 315-445-2147 or george.urist@lpl.com. Company information can be found at www.uristfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities offered through LPL Financial. Member FINRA/SIPC