More Americans are feeling confident about their ability to afford
a comfortable retirement, according to a long-running national
survey. But there are big gaps in confidence between workers who have a
retirement plan, such as a 401(k), and those who don’t.
Overall, 64 percent of workers say they feel confident about their
future retirement, according to the survey, which has been conducted by the nonprofit Employee
Benefit Research Institute (EBRI) for 28 years. That’s an improvement over the
60 percent of workers who felt confident last year.
Among retirees, some 75 percent were very or somewhat confident about
their ability to maintain a comfortable retirement. But medical expenses are a
growing concern—only 70 percent were confident about covering these costs,
compared with 77 percent in 2017.
As in previous years, participation in a retirement plan is closely
linked to workers’ confidence. Some 75 percent of those covered by a 401(k), an
IRA, or a pension are at least somewhat confident about retirement vs. 34
percent of those who aren’t.
“For most workers with 401(k)s, there’s an advantage of a company
match,” says Craig Copeland, senior research associate at EBRI. “Another big
effect is automatic saving—the money comes out of the paycheck before it’s
spent.” Over time, these workers see their retirement account balances build
up, which helps create optimism.
But half of American workers lack an employer plan, data show. Many
workers these days are freelancers, or they may work part-time and do not
qualify for a plan. Others work for small businesses that lack retirement
Many states are trying to address this problem by launching state
retirement programs, which would encourage small-business owners who do not
offer retirement plans to direct payroll deductions into IRAs for their
employees. Some 30 states and a few cities are in
various stages of designing and implementing these programs—Oregon’s plan has started to roll out. But last year
Congress blocked a rule that would make it easier for more states
to set up these plans, so they’re unlikely to gain critical mass anytime soon.
Still, the good news is that it’s easy for freelancers and other workers
who lack employer plans to set up their own version of a 401(k), which can help
you save on taxes as well as build savings. You can find these
retirement-account options offered at most fund companies and brokerage firms
at low cost. Here are three popular plans to consider:
Traditional or Roth
If you’re just starting out, you may want to stick to basics: a
traditional or Roth IRA. You can put in as much as $5,500 in 2018 (plus an
additional $1,000 if you’re 50 or older). With a traditional IRA, your
contributions may be deductible, and the growth is tax-deferred.
For most freelancers, because you’re not covered by an employer plan
your traditional IRA contributions are deductible, with no income limits. But
if you have a spouse covered by a plan, income limits may apply; for more
details, check the IRS website.
With a Roth IRA, your contributions are made on an after-tax basis, but
your money will grow tax-free, and you’ll pay no taxes on your distributions as
long as you follow the withdrawal rules. (Generally, you must
have held the account for five years and have turned 59½ or older.) Plus you
can take out your own contributions anytime without paying tax. Roth IRAs do
have income limits—those married filing jointly
must have modified adjusted gross incomes below $189,000 this year to make a
Which IRA is right for you? A lot depends on your age and current income.
Young people, for instance, are likely to have smaller incomes and thus pay
less than they will when they get older.
“If you think that your taxes will be higher than they are today, a Roth
IRA might be better,” says David Littell, a professor of taxation at the
American College of Financial Services.
Conversely, those with higher incomes might want to get the immediate
tax deduction with a traditional IRA. (This Bankrate.com calculator can help you choose
between a Roth and a traditional IRA.)
Still, it’s impossible to know with any certainty how your taxes might
change years from now, which is why many financial advisers suggest hedging
your bets. Contribute to both types of IRA, though you’ll need to keep your
total contributions under the $5,500 or $6,500 limit for this year. And revisit
your choices periodically as tax rates and your income change.
Whichever IRA you choose, set up an automatic investing plan to ensure
that your savings really happen, which is a key advantage of employer 401(k)s.
At most fund companies and brokerages, it’s simple do this online—just enter
your bank information, how frequently you want to invest, and the amount of the
“If you’re not sure about your cash flow, it’s fine to start out with
small amounts, even $100 a month,” says Marguerita Cheng, a certified financial
adviser and CEO of Blue Ocean Global Wealth in Gaithersburg, Md. “You can
increase the amounts later, when you have a better feel for your income.”
If you’re working for yourself or have a part-time job, you can open a
Simplified Employee Pension (SEP) IRA. With these plans, you can get a
deduction on your contribution, which will grow tax-deferred. As with regular
IRAs, SEPs are widely available at brokerages and fund companies.
If you have incorporated as a business, you can stash away as much
as 25 percent of your compensation in a
SEP, up to a maximum of $55,000 in 2018. For those who are unincorporated,
your contribution limit is 20 percent of your income, after deducting half of
the self-employment tax, which is the FICA
These plans are highly flexible, which makes the SEP an appealing choice
if you don’t have a steady income stream.
“It’s the perfect plan for procrastinators,” Cheng says. You don’t have
to make a contribution every year. And you have until April 15 to put in the
money—or even October, if you file for an extension.
For sole proprietors, an individual 401(k), also known as a solo 401(k),
allows you to set up your own retirement plan with many of the same benefits as
a large-company 401(k). (To qualify, you cannot have any employees other than
your spouse.) As with an employer plan, you can have contributions deducted
from your paycheck and invested tax-deferred in the funds of your choice. Some
providers offer a Roth 401(k) option.
With a solo 401(k), you may be able to stash away even more money than
you can in a SEP IRA, depending on your income level, says Jeffrey Levine, a
CPA and certified financial planner at BluePrint Wealth Alliance in Garden
City, N.Y. That’s because you can contribute two ways, both as an employer and
as an employee, up to a maximum of $55,000 this year, or $61,000
if you’re 50 or older.
Say you earn a $100,000 net profit from your business. As an employee,
you can contribute up to $18,500 this year ($24,500 if you’re 50 or older), or
up to 100 percent of compensation, whichever is less. Plus, as the employer,
you can stash away up to 25 percent of your profits, or $25,000. In total, your
contribution would be as much as $43,500. By contrast, you would be able to put
away only 25 percent of that $100,000 profit, or $25,000, in a SEP. (To see how
much you can contribute, try this calculator.)
There may be a bit more paperwork involved with an individual
401(k)—plans with more than $250,000 in assets are generally required to file a
Form 5500 with the IRS. Still, most providers can do that for you, often as
part of the basic service fee.
With a solo 401(k), you can also borrow from your plan—generally you can
take out as much as 50 percent of the balance up to $50,000—if your provider
offers that feature. That’s a welcome backstop in an emergency. But as with a
regular 401(k), your goal is to let that money alone to grow until you’re ready
to tap it in retirement.
Click here for the original article from Consumer Reports.