A new year means it is time for resolutions, like getting in shape or getting organized. But what about financial fitness and organization? The new year can be a great time to think about the future and reevaluate your financial goals. Right now, you might be looking ahead to 2020, but what about 10, 20, or even 30 years in the future? Financial fitness is a long game, and if you haven’t started thinking about retirement, there is no better time than now. Katelyn Anderson, a certified health savings professional (CHSP) and certified IRA specialist (CIS) from Olympia Federal Savings (OlyFed) wants you to start thinking about your retirement today.
There are several different types of Individual Retirement Accounts (IRAs):
Traditional IRA- The most popular type of IRA, the traditional IRA offers the tax advantage of contributions being tax deductible, lowering your taxable income for the year. Interest earned is not taxed as long as the money remains in the account. Withdrawals made during retirement are taxed as income at your tax rate at that time.
Roth IRA- Contributions for a Roth IRA are not tax deductible; therefore, they will not be taxed when they are withdrawn at retirement. There are income limits on using a Roth, so keep that in mind.
SEP IRA – SEP or Simplified Employee Pension, is a traditional form of IRA set up for employees by their employer. The employer receives tax advantages and it can be great for small business owners looking to avoid startup and operating costs of a traditional retirement plan. SEP IRAs can also be useful for sole proprietors. There are some financial advantages to this type of IRA, but also some drawbacks, such as SEP IRAs are not eligible for catch up contributions after age 50.
“It is never too early to start,” says Katelyn, “and the earlier you can start the better.” OlyFed’s IRAs are invested in Certificate of Deposits (CDs), stable accounts that earn a fixed level of interest for the whole term of the account. Unlike stock portfolios, the principle is protected. Every dollar you are able to save will earn you interest until you withdraw it. “What you put in is going to be there for your retirement, plus that earned interest,” adds Katelyn. That provides a higher level of security than stock market investments, which can be impacted by volatile market trends. CDs are FDIC insured, providing stability and security backed by the US government.
When you are just starting out, it can be convenient to have a flexible IRA with a low starting balance requirement. “Our minimum starting balance is just 50 dollars,” says Katelyn, “and some customers might only deposit 50 dollars a month.” Customers are not required to deposit on a schedule with OlyFed’s retirement account either, and some find it beneficial to skip months when unexpected expenses arise in their budget. Eventually, you can work up to a higher regular monthly savings goal, perhaps even maxing out your annual contribution cap.
Maybe retirement seems like a distant thing that doesn’t merit attention now. You may even have more pressing savings goals, like saving for the down payment on a home. The two goals are not actually as separate as you might think. “The IRS allows a onetime withdrawal of $10,000 with no penalty for first time homebuyer expenses,” Katelyn explains. The regulations are different between traditional IRAs and Roth IRAs, so you should check with your financial advisor before making any withdrawals.
What happens if you realize that you are behind in your retirement planning? Good news, any investment you make now is more than no investment at all. And if you are 50 years or older, the IRS allows catch up contributions of an extra $1,000 a year. “Some people may be hesitant because they have already seen some of their own IRAs that are invested heavily in stocks take some hits, and they may have lost some of their principle balance,” explains Katelyn. That is why she really recommends the CD IRA accounts, which are secure investments.
“As people begin to reach retirement age, we take special care to reach out to our customers to make sure they making at least the minimum withdrawals (called distributions) to make sure they aren’t incurring any IRS penalty taxes on their retirement funds,” Katelyn says. “After age 70 and a half, we offer an annual IRA upgrade, which allows the customer to modify the term or bump up to a higher interest rate if one is available.”
No matter where you choose to invest in your retirement, Katelyn has some questions to keep in mind when you choosing a financial institution to invest with:
- Does the account have administrative fees?
How flexible is the account; are you required to make deposits on a set schedule?
- Is the best rate based on your relationship with the institution? For example, are you required to have other accounts (checking, savings, etc.) with the institution to get the best interest rate on the retirement plan?
- What other things may be required of you as the customer?
- Finally, and this is important, do you feel comfortable asking questions and do you feel that you are getting all the answers you need?
Responsible financial planning for your retirement is an important part of self-sufficiency. Sure, there are government safety nets like social security to help, but setting up your own savings is the best way to ensure your later years are truly your golden years.
If you have questions about what kind of IRA can work best for you, stop by any one of OlyFed’s eight local branches, or give them a call at 360-754-3400.