Is money important? To answer that question we turn to the inscrutable observer of humanity, Woody Allen, who proclaimed, “Money is better than poverty, if only for financial reasons."
To obtain money, outside of winning a lottery (average odds of winning, 1 in 259 million), gifts or an inheritance, you will need a well-paying career, or build a successful enterprise, while saving a good chunk of what you earn along with a debt-management program.
How much may I save in 2014 on a tax-favored basis? Up to $52,000 may be put away in a 401(k) plan with up to $17,500 contributed by the employee. Someone age 50 or older may add a $5,500 “catch up” provision, contributing $23,000. You may withdraw money free of penalty at age 59 ½. Required Minimum Distributions (RMD) commence at age 70 ½ unless you still are working. The elective tax-deferred contribution limit of $17,500 and age 50 plus catch up amount of $5,500 also applies to 403(b) plans, most 457 deferred-compensation plans, and the federal government’s thrift savings plan.
Money withdrawn from these plans at retirement is taxed as ordinary income. If you are in an average 20% federal and state income tax bracket and you spend $2,500 per month from your retirement plan to supplement Social Security or other income, you have to withdraw $3,125 per month, or $37,500 per year.
To spend $5,000
per month from a retirement plan, at the modest 20% average tax bracket you
must withdraw $6,250 per month or $75,000 per year.
Yikes, could I run out of money before I die? Woody Allen said, “I am not afraid of death, I just don’t want to be there when it happens.” You will be there, and so might a surviving spouse. So the question may be, “Could we run out of money?” If you apply the often quoted theory that you don’t want to take more than 4% of principal yearly out of your retirement stash to minimize the risk of depleting savings, at $75,000 per year you need $1,875,000 in capital.
Should I up my savings goals? For sure! Traditional tax-deferred IRA contribution limits for 2014 are $5,500, plus an extra $1,000 as a catch-up measure for those 50 or older, a total of $6,500. The deduction is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000. For an IRA contributor not covered by a workplace retirement plan and who is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000.
I forgot that Uncle Sam is a participating beneficiary in my retirement savings plans. Is there a way around that?
Yes, if you forgo tax-deductions now on a Roth IRA or Roth 401(k) contribution, you will never pay taxes on accumulations. Money grows tax-free and is withdrawn tax-free, plus there is no Required Minimum Distribution at age 70 ½. If you are young and/or in a relatively low tax bracket the Roth option is attractive. You can make contributions to a Roth IRA up to $5,500 with a $1,000 catch up at age 50 or more. The AGI phase-out range is $181,000 to $191,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $114,000 to $129,000.
For educational goals, you may save money with tax-advantaged growth in 529 College Savings Plans and/or a Coverdell Education Savings Account (ESA). For personal savings on the taxable side of your ledger, explore options that can generate long-term capital gains taxed at a lower rate than ordinary income. Some alternative investments may generate income partially sheltered from taxes.
Woody Allen noted, “I believe there is something out there watching us. Unfortunately, it’s the government.” We did not need Edward Snowden to remind us of that. It happens every April 15th!
Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ firstname.lastname@example.org