How to Cut Costs and Save for the Future
Is it better to pay off debt or to use that money as a contribution to a retirement account, like an IRA or SEP? Your situation is unique, and finding the right balance requires an understanding of the trade-offs involved with each investment vehicle.
And, whether you pay down debt or max out an IRA changes with age, income, a new addition to the family your fiscal plan should be re-evaluated every time you and your loved ones, and your business, undergo a significant change.
Here are a few factors to consider:
- Retirement plan investing is generally tax deferred, it reduces current taxable income and it uses the power of compounding, tax free , over time. Generally, retirement investments aren’t accessible for current needs without paying a stiff penalty for early withdrawal.
Tap into your IRA before you’re 59½ and you get hit with a 10% penalty AND you pay taxes on your early withdrawal. That hurts today and down the line.
- Forfeiting retirement contributions to pay down mortgage or car loans is not advisable for fixed, low-interest, long-term debt. This is “inexpensive” money and, in the case of home and business debt, interest on these loans is tax deductible so the government, in effect, pays a portion of your debt.
- Credit card debt, with high interest rates, is “expensive” money. Determine what you can pay down each month at your current income level. Pay off expensive credit card debt first. You could be paying 29% interest on that big screen TV.
- Retirement contributions should still be made annually, even if some sacrifices are required. Pay down expensive debt, but save for tomorrow. You’ll never regret it.
- Ideally, manage your cash to reduce expensive debt and, simultaneously, increase retirement plan contributions to the maximum. That’s how you’ll enjoy financial security during retirement.
Popular business-related retirement programs are based on one of three models:
- Individual Retirement Plans
- Defined Contribution Plans
- Defined Benefit Plans
Which is right for you? Do your homework. Each of the following has benefits and limitations. Choose the plan that suits you today and best fits your financial objectives for those Golden Years.
- Payroll Deduction Individual Retirement Account (IRA) is easy to set up and maintain. Every wage earner should have one. Contact your local bank, or the IRS, for more information.
- Simplified Employee Pension (SEP) is an uncomplicated retirement program available to any business. Ideal for sole proprietorships, partnerships and small companies with a few employees. Very easy to maintain.
- Simple-IRA is a salary reduction plan with little administrative paperwork.
- Traditional 401(k) is an employer-sponsored plan that permits employees to contribute pre-taxed dollars for a brighter, long-term future.
- Safe Harbor 401(k) & Automatic Enrollment Safe Harbor 401(k) plans are a good choice for businesses establishing a plan for the first time.
- Roth 401(k) allows employees to make after-tax contributions to their employer’s 401(k) plan. Withdrawals during retirement are tax free. Pay the tax today; enjoy tax-free income for life when you retire.
- Profit Sharing is the most flexible plan available to small business owners. Profit sharing permits businesses to make large contributions on behalf of their employees.
- Defined Benefit plans provide a fixed, pre-established benefit for employees upon retirement.
Which plan is best for you? Your employees? The long-term benefit to your business? Talk to a retirement specialist. Your local bank branch has a retirement professional available for consultation a good way to go for sound, free financial advice.
Where are you today? And where do you want to be 20, 30, even 40 years from now? Weigh the pros and cons of each plan.
Then, today, plan for the best future for you and your loved ones.
For detailed information on plans available to individuals and employers, current year allowable contributions, reporting requirements and guidance, visit The Internal Revenue Service (IRS) at www.irs.gov/retirement.