As you know, CPA Accounting and Tax Solutions is an Accounting, Bookkeeping, Payroll, Audit, and Tax company. We are not financial planners. We do blog about the importance of saving, whether that be for retirement or special goals like a college education for your kids. We do pride ourselves as a Solutions company, and we really care about our clients’ financial welfare.
I decided to do some research on the number of small companies are offering their employees a 401K retirement savings vehicle. As our readers know, a 401K allows you to both save for retirement, as well as defer taxes on the portion of your salary you contribute to the 401K. In addition, you pay no taxes on the earnings on those contributions until withdrawn. Unfortunately, there is not much data out there, but I did discover a report from the General Accounting Office.
As readers of our blog are aware, we at CPA Accounting and Tax Solutions have been crusading to get people to save for their retirement. In doing our tax work, we often find people with little or no savings, and little or no appreciation for their financial needs after retirement.
A common response is:” I really can’t save much, and the little I can save won’t result in any significant savings anyway”. Continue reading
WITHDRAWALS FROM YOUR IRA OR 401K SAVINGS
Often, it appears that withdrawing money from your traditional IRA or 401K is a sensible financial alternative to high interest credit card debt, or a financial crisis, and that may be true,
BUT BE AWARE OF VERY NASTY FEDERAL TAX CONSEQUENCES, WHICH MAY SURPRISE YOU AT TAX FILING TIME
These Federal tax consequences include taxes due on the withdrawal, and possibly a 10% penalty as well. You may not be aware of, nor prepared for these consequences.
When we do our tax work at CPA Accounting and Tax Solutions, we are amazed at how little people are saving towards retirement. We are even more amazed at how many retirement age people have little or no savings, and expect to work indefinitely. While there is absolutely nothing wrong with working beyond the traditional retirement age, working is a lot more fun when it is not motivated with economic survival.
Outside of state and federal Governments, and a very few large companies, the defined benefit pension is a thing of the past. As a reminder, these defined benefit pensions paid you a fixed monthly amount upon retirement, based on your years and earnings. In some cases you could take a lump sum, and handle your own retirement needs.
In their place, companies created voluntary 401K plans into which you save for retirement, often with a company match of some portion of your contributions. Contributions to these 401K plans are pretax, meaning you don’t pay taxes until you withdraw the funds at retirement. Please see our other blog articles in the “Saving Series’, on CPA Accounting and Tax Solutions’ web site, which provide more detail on both pretax, and post tax retirement savings vehicles. We don’t present detail on savings vehicles in this article, focusing entirely on the NEED TO SAVE.
Our purpose here is to encourage you to begin saving for your retirement, and to motivate you to start saving now. Social Security does not provide sufficient income on which to live comfortably. You will be far more active than you think, and most likely you will live longer that you think. Contrary to what you may think in your younger years, your appetite for an active comfortable life does not diminish at all in your retirement years.
In short, you will need a lot more money in retirement than you think, and you need to begin a systematic savings program now.
- Create a payroll deducted savings plan, so you never receive the funds.
- Increase the savings amount with each increase in pay.
- If you are self employed, have your accounting firm help you create and fund your retirement through systematic savings. CPA Accounting and Tax Solutions can help you with these issues.
In closing, DO NOT ever withdraw from your qualified (pre tax) retirement savings unless absolutely necessary. Our next blog article discusses the tax implications of these withdrawals.
As we mentioned in our last BLOG , saving toward retirement must be one of your top priorities. I see many people continue to work well beyond the traditional retirement age of 65. While some people are very happy working beyond 65, too many are required to work to make ends meet. You should begin to save systematically, as early in your working career as possible. Regular investments produce spectacular results over time through compounding. In future blogs, I’ll run a few examples to demonstrate the power of regular savings. Starting a savings plan with small monthly investments, creates the savings habit. Then increase the monthly amounts as you are able, and you will be amazed at how much you have after 5 years.
One thing that is absolutely certain in these uncertain times is the fact that we all getting older. That means someday we will either be retired, or want to be retired. For most of us, we will need savings to be reasonably comfortable in retirement, and we will need a lot more savings than you think. Speaking from experience, and contrary to what most young people think, you really don’t cut back on your living expenses that much when you retire, unless you have no choice. Most people are healthy and active retirees, playing sports, travelling, giving back and so on.
Sadly, the savings rate in our country is very low. Many young and middle aged people have little or no savings at all. It is hard to save because people tend to think you need to put a lot away, but in fact, regular systematic savings result produce amazing results, even with amounts as small as $25 a month. Next we are going to tell you how you can save for the future, and gain a tax advantage as well. Continue reading