Get Your Retirement Savings on Track

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Everyone hopes for a comfortable retirement, but most people aren’t doing enough to make it possible.

A 2018 study found that 1 in 3 Americans have less than $5,000 in retirement savings and 46% percent have taken no steps to prepare for the likelihood that they could outlive their savings (source).

Although most people are not doing enough, retirement savings doesn’t have to be complicated. If you’re looking to get your retirement savings on track, here are 5 simple steps that you can follow.

Step 1: Establish an Emergency Fund

Although it may not be directly related to your retirement savings, having some emergency savings is an important step. Unexpected things can and will happen, and unfortunately, they can be quite costly.

You may need to tap into emergency savings in the event of a sudden job loss, major health issue to someone in the family, or unexpected repair or expense.

Without an emergency fund, your savings can be derailed and any progress that you’ve made will be halted or even undone.

When that unexpected medical bill comes, without an emergency fund, your retirement savings may be the first thing to be sacrificed.

Most experts suggest that you should have enough money in an emergency fund to cover at least 3-6 months of living expenses, but your personal or family situation can impact your needs.

Single-income families will be at greater risk compared to a dual-income family. Those with unpredictable incomes, like the self-employed, will also be at greater risk compared to salaried employees. If you fall into the higher risk areas, it’s a good idea to have a larger emergency fund.

Your emergency fund should be kept where it can be easily and quickly accessed, and without any financial penalty. A savings account or a money market account is a common choice. An internet bank like CIT Bank that offers high-yield savings and money market accounts is a good option.

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Step 2: Evaluate Your Options

There are several different retirement accounts or plans that you can use, but not all of them will be an option for everyone. You’ll need to evaluate your own situation to see which types of accounts are available, and determine which ones make the most sense for you to prioritize.

The accounts listed below do not cover all of the possible options, but these are some of the most popular and most common types of retirement accounts.

401(k) or 403(b)

The 401(k) is probably the most common type of retirement account, with 79% of American workers having access to one (source). In order to have access to a 401(k), it will need to be offered by your employer.

A 403(b) plan is very similar to a 401(k), except that 403(b)s are offered by non-profit organizations, schools, and government organizations.

As an employee, you may have access to either a 401(k) or a 403(b), but your employer will not offer access to both. You’ll have access to whatever is offered by your employer, as long as you meet the qualifications (part-time employees are sometimes not eligible).

There are a few major advantages to investing in a 401(k) or 403(b):

  1. Contributions are pre-tax and will reduce your taxable income
  2. Your investment will grow tax-free until it is withdrawn
  3. Many employers will match your contribution (up to a maximum percentage)

The combination of reducing your taxable income and getting the match from an employer make the 401(k) or 403(b) a very attractive way to save and invest for retirement.

For 2019, the maximum contribution allowed to a 401(k) or 403(b) is $19,000. An additional $6,000 of catch up contributions is allowed for those who are 50 years old or over.

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Traditional IRA

Unlike the 401(k) or 403(b), you’re not dependent on your employer to have access to an individual retirement account (Roth or Traditional). Anyone can open an IRA and there are many different types of investments that can be held within an IRA.

Contributions to a traditional IRA are made pre-tax (with some limitations – more on that in a minute), so they will reduce your taxable income. The amount in your traditional IRA is not taxed until it is distributed, just like a 401(k).

In 2019, you can contribute up to $6,000 total in all of your Traditional and Roth IRAs, or up to the amount of your income if your income for the year is less than $6,000.

If you are 50 years old or over, you can contribute up to $7,000 in 2019.

While anyone can contribute to a Traditional IRA, contributions will not be tax deductible if your income is over a certain limit. The limits below are based on modified adjusted gross income (MAGI):

  • Single individuals with income over $137,000 cannot make tax-deductible contributions.
  • Single individuals with income between $122,000 and $137,000 can make a partial contribution that is deductible.
  • Married couples filing jointly with income over $203,000 cannot make tax-deductible contributions.
  • Married couples filing jointly with income between $193,00 and $203,000 can make a partial contribution that is deductible.

Roth IRA

A Roth IRA is another type of account that has some significant benefits. Contributions to a Roth IRA, unlike contributions to a 401(k) or a Traditional IRA, are post-tax, which means they will not reduce your taxable income. However, the growth and future withdrawals are not taxed, as long as you follow the guidelines.

Although the short-term tax benefit of 401(k) and Traditional IRA contributions are nice, there are some very convincing reasons to consider a Roth IRA:

  • Paying tax now means that you’ll pay less in taxes overall, since you won’t be taxed on the growth or when the money is withdrawn.
  • Delaying tax payments (like you are doing with a 401(k) or traditional IRA) means that you may be paying taxes at a higher rate if tax rates increase between now and the time you withdraw from the account.

The contribution limits of $6,000 (if you’re under 50) or $7,000 (if you’re 50 or over) apply to both Traditional and Roth IRAs. That is a total amount that you can contribute to either type of IRA, or a combination of both types.

There are also some income requirements that restrict who is eligible to contribute to a Roth IRA. The restrictions below apply based on modified adjusted gross income (MAGI):

  • Single individuals with income over $137,000 are not eligible.
  • Single individuals with income between $122,000 and $137,000 can contribute a reduced amount.
  • Married couples filing jointly with income over $203,000 are not eligible.
  • Married couples filing jointly with income between $193,00 and $203,000 can contribute a reduced amount.
  • Married couples filing separately are less likely to be able to contribute to a Roth IRA. See this page for details.
 401(k)Traditional IRARoth IRA
Contributions are tax deductibleYesYesNo
Withdrawals are tax-freeNoNoYes
Max contribution (2019)$19,000$6,000$6,000

SEP IRA

A Simplified Employee Pension (SEP) plan is a type of Traditional IRA that is an option for businesses owners. A SEP IRA can be used to provide an investment account for yourself if you are self-employed, and it can also be offered to your employees. If you have employees, it’s important to note that contributions must be the same for the employer and employees.

Contributions to a SEP IRA are deductible, so they will reduce your taxable income. Taxes will be paid when money is withdrawn from the account.

In 2019, you can contribute up to 25% of your net income into a SEP IRA, up to a maximum of $56,000.