Certified Public Accountants

Thinking About Your Retirement

TAXING TIMES, May 2014 Edition

By Rick Torkelson, CPA and principal of Torkelson & Associates, LLP in Petaluma, CA

It’s never too early to project your financial life after retirement.  In fact, the younger you are when you act on your retirement pocket, the better.  Albert Einstein is rumored to have said “the biggest miracle in the world is the miracle of compound interest”.  This means the more years you can put between saving for retirement and retiring, the better.

Everyone thinks there are all these tax loopholes for the wealthy – well I have a great loophole for almost everyone.  Imagine this: Legally put money in your own bank account and write it off on your tax return!  That’s exactly what you are doing when you put money into your retirement account.

The next step is to come up with a plan.  Forget about all the income limits and phase out of deductions and ask yourself “If you can put any amount you want into a pension plan and the only constraint is that you have to have the money to put into it, how much would you put in?”  The answer to this question usually makes the choice of plan pretty clear.

If there is no plan where you work and you can muster $5,000 or so, a conventional IRA is your plan for now.  If you’re married and your spouse has no plan at work – or even if one of you is not working, you can put in up to $5,500 for each spouse – $6,500 if you’re over 50.  That’s up to $13,000 a year just in an IRA.

If you work for an employer with a retirement plan, your contributions can be even greater – AND the employer in many situations will match part of your contribution.  In your more sophisticated plans like a 401(k), you can defer up to $17,500 of your earnings per year – $23,000 if you’re over 50.  These amounts are “indexed” and increase slightly every year.  When your employer is matching part of your contribution, you should always participate in the plan if you can.

Saving money is not as fun as spending it, but everyone working should have a retirement goal that owns your own house debt free, draws social security, and has as much as possible in retirement savings to supplement your cost of living.  There would be very little tax erosion in this modest retirement situation and if there was a lot of tax, it would be because the retirement savings was so high – and that’s a good thing.

Final Comments

The bottom line is to take action now on saving for your retirement.  You take your money and put it in your retirement account and you get to write it off on your taxes.  This is a tax loop hole for everyone.  The younger you are, the more those years between now and retirement can work for you.  The key is to start.  Even if you put a hundred dollars a month into an IRA – Everyone wastes at least a hundred dollars a month.  When your income increases, your retirement savings should increase too.

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