Financial Security Advisors, based in Prairie Village, offers tips on getting the best return out of your company pension plan and other vehicles for retirement saving.
Story by Marsy Gordon
Saving for retirement is a good idea. Saving wisely is a better idea. Getting a solid return on every hard-earned dollar saved is the best idea.
I talked with the financial planners at Financial Security Advisors (which, incidentally, is where I spend Monday through Friday each week) to get some tips on smart saving. Sandi Weaver, CPA, is a chartered financial analyst, and Jim Stoutenborough is a certified financial planner at the Prairie Village, Kan.-based firm.
Weaver and Stoutenborough agree that the key to smart saving is to start as early as possible, set an annual goal amount and look at the tax implications of the savings vehicle. They discussed the best ways to make the most out of your savings.
Marsy Gordon: What is the single most efficient way to get the biggest bang for your buck when saving?
Sandi Weaver: First and foremost, contribute to your company pension to get the company match – the amount your employer will put in for you. That’s free money. Find out what your company’s policy is, say matching 50 cents on the dollar up to 6 percent of your salary, or dollar-for-dollar on the first 3 percent of salary, or some other formula. If you don’t know your company’s policy, check your summary plan description or ask your HR department.
MG: Why is this the best way to save?
SW: Contributions to a company pension plan are in pre-tax dollars, which means you don’t have to pay tax on that portion of your salary. If both members of a married couple have pension plans available, be sure to contribute to get the company match on both plans.
MG: After getting the company match on your pension, what’s the next most efficient way to reach the goal you set for the year?
Jim Stoutenborough: Contribute to a Roth IRA. “After tax” money goes into a Roth, but there is no tax charged on your deposits or on the growth when you take the money out. This year, the maximum amount that can be contributed to a Roth is $5,500. Since each spouse of a married couple can have a Roth IRA, that amount can double. Keep in mind that there are earnings limits to be eligible for a Roth.
MG: OK, we’re off to a great start – “free money” from the employer, and the Roth has its annual maximum contribution, but we’re not to the annual goal amount that we want to save yet. Where should the smart saver look next?
SW: Go back to your company pension – 401(k), 403(b), or Simple IRA. Subtract the amount you’ve already contributed to get the company match, and then use payroll deductions to contribute up to the limit of $17,500 per year. Remember, you skip paying taxes on these dollars if you put them in your pension.
MG: You mentioned that your income might be too high to make a Roth contribution. What is that magic number?
JS: You can’t contribute to a Roth IRA if your adjusted gross income is over $178,000 for a married couple. If it’s over that amount, and you don’t have a company pension plan, you can contribute to a traditional IRA. Just like the Roth, you can contribute up to $5,500 to an IRA. You get a deduction on your taxes for the amount contributed, and the money in the IRA grows without being taxed. You only pay tax on the money as it is withdrawn. One thing to keep in mind with any IRA contribution is that it cannot exceed your earned income for the year.
MG: Any other options for IRA contributions?
SW: High-income earners still can make a contribution to a traditional IRA, even if they have a pension. They just don’t get a deduction for the contribution itself. The money grows without the “headwind” of taxes. The money is taxed as it is withdrawn.
MG: Company pension plans and IRA’s sound great, but what if you’ve put the maximum into those and still haven’t met the goal you’ve set for your annual savings?
SW: In certain circumstances, a variable annuity can be good as long as it’s one with a low fee. Generally speaking, Financial Security Advisors only recommends a variable annuity if you’re in the top-tax brackets, and expect to stay there for the next 15 years. An annuity grows without being taxed each year. Beyond that, a taxable brokerage account is an option. It’s good to have some accessible money, but be careful not to start using this as an emergency slush fund.