January 2012
Saving for Your Retirement while your Spouse is in the Military
2012. The year that you are going to invest in yourself. The year you are going to save money so you are not sitting at the kitchen table at age 60 saying, “How are we ever going to afford to retire?” Your active duty spouse has access to all sorts of retirement benefits. The two heaviest hitters available are the military pension and the Thrift Savings Plan (TSP) which will both be featured in a future article. Depending on how you are using those resources, odds are they won’t be enough on their own. So, what are you doing to save for yourretirement?
I AM A STAY AT HOME SPOUSE…
All retirement savings plans require earned income to participate, except if you are a non-working spouse. There is an exception called the Spousal Traditional IRA or Spousal Roth IRA that allows a non-working spouse to contribute $5,000 a year, $6,000 if you’re over 50. If you make too much money, these aren’t available to you starting at $173,000 of Adjusted Gross Income in 2012. The non-deductible IRA is available regardless of income. Think this won’t make a difference? If you’re 30 and contribute $5,000 to a Roth IRA for the next 30 years and invest it at 7%, you will end up with about $472,000 at age 60. Of this $472,000, only $150,000 is from your contributions. How is this? The 8th wonder of the world! Compounding interest. But, the key word is “compound.” Leave it alone. Allow it to grow. Ever grown a tree? It didn’t happen overnight and it definitely won’t happen by digging up the seed every week to just “check and see how it’s doing.”
I AM SELF EMPLOYED OR HAVE AN AT HOME BUSINESS…
In addition to the options above, you can do more. Not only are you earning extra income for your family, but you can give a big boost to your family’s savings while taking a bite out of your tax bill. The appropriate option depends on if you have employees and how your business is structured. To make this determination, you will most likely need to work with a professional, so feel free to contact me with questions. Two options are to set up an IRA for the business and contribute 20% of your net earnings as a pre-tax deduction. If you want to really maximize the tax advantage you can establish a Solo(k). This is a 401k for one person and you can contribute $17,000, $22,500 if you are over 50, as well as a 20% profit-sharing contribution based on your net earnings. Sounds confusing but worth it to understand if you are self employed.
I AM WORKING AS AN EMPLOYEE OF A COMPANY…
Your employer probably offers a retirement plan and it is most likely a 401k or a SIMPLE IRA. You can make a pre-tax salary deferral of $17,000 in 2012, $22,500 if you are over 50 in a 401k. Those amounts are reduced to $11,500 or $14,000 if you are over 50 in a SIMPLE IRA. If your employer offers a match, make sure to take full advantage. Check if your employer offers a Roth 401k. (A Roth version of your spouses’ TSP is coming second quarter of 2012.) The Roth 401k could be a great option to get the tax bill out of the way now and have tax-free income at retirement. Good news, you can’t “make too much money” and be disqualified with a Roth 401(k). Also, if your spouse has a military pension and a TSP those are both pre-tax. It is nice to have pre-tax and after-tax money when you are entering retirement.
I AM A STAY AT HOME SPOUSE…
All retirement savings plans require earned income to participate, except if you are a non-working spouse. There is an exception called the Spousal Traditional IRA or Spousal Roth IRA that allows a non-working spouse to contribute $5,000 a year, $6,000 if you’re over 50. If you make too much money, these aren’t available to you starting at $173,000 of Adjusted Gross Income in 2012. The non-deductible IRA is available regardless of income. Think this won’t make a difference? If you’re 30 and contribute $5,000 to a Roth IRA for the next 30 years and invest it at 7%, you will end up with about $472,000 at age 60. Of this $472,000, only $150,000 is from your contributions. How is this? The 8th wonder of the world! Compounding interest. But, the key word is “compound.” Leave it alone. Allow it to grow. Ever grown a tree? It didn’t happen overnight and it definitely won’t happen by digging up the seed every week to just “check and see how it’s doing.”
I AM SELF EMPLOYED OR HAVE AN AT HOME BUSINESS…
In addition to the options above, you can do more. Not only are you earning extra income for your family, but you can give a big boost to your family’s savings while taking a bite out of your tax bill. The appropriate option depends on if you have employees and how your business is structured. To make this determination, you will most likely need to work with a professional, so feel free to contact me with questions. Two options are to set up an IRA for the business and contribute 20% of your net earnings as a pre-tax deduction. If you want to really maximize the tax advantage you can establish a Solo(k). This is a 401k for one person and you can contribute $17,000, $22,500 if you are over 50, as well as a 20% profit-sharing contribution based on your net earnings. Sounds confusing but worth it to understand if you are self employed.
I AM WORKING AS AN EMPLOYEE OF A COMPANY…
Your employer probably offers a retirement plan and it is most likely a 401k or a SIMPLE IRA. You can make a pre-tax salary deferral of $17,000 in 2012, $22,500 if you are over 50 in a 401k. Those amounts are reduced to $11,500 or $14,000 if you are over 50 in a SIMPLE IRA. If your employer offers a match, make sure to take full advantage. Check if your employer offers a Roth 401k. (A Roth version of your spouses’ TSP is coming second quarter of 2012.) The Roth 401k could be a great option to get the tax bill out of the way now and have tax-free income at retirement. Good news, you can’t “make too much money” and be disqualified with a Roth 401(k). Also, if your spouse has a military pension and a TSP those are both pre-tax. It is nice to have pre-tax and after-tax money when you are entering retirement.