Watch Your IRA Accounts

Don’t be complacent about your 401(k). Many employees who simply have their employer deduct the maximum possible amount to a 401(k) without asking any questions may be missing out on more productive alternatives, according to financial experts. In some instances, the fees charged by an investor’s 401(k) may be excessive. Investing in another alternative, such as a Roth individual retirement account could offer more choices and lower fees. Look at the entire financial picture before making decisions.

Careful Planning

Have a plan. Random decisions on retirement maybe counterproductive. There is the temptation to live in the moment, making decisions “on the fly.” Over the course of the usual working career, that could result in savings that will fall short when the job is done and retirement income has to cover all the bases. Start with small goals, if necessary, such as putting 5 percent of gross income into savings each month, then increase gradually until you are saving 15 percent, and do it within a year if possible. A pattern of constantly shorting the savings cushion seldom can be reversed as retirement looms.

Cut Back Expenditures

Think seriously of scaling back now. Downsizing your home and boosting savings often are two sides of the same coin, the experts suggest. Putting on blinders and delaying such moves until suddenly the 60s are upon you is a sure-fire way to ensure unpleasant surprises when the time comes. Thinking you still have time to reduce spending when retirement is just a few years away may result in too-tight budgets that complicate retirement for too many. As age inevitably takes a toll, you could be unpleasantly surprised to find that illness or other complications end your working days prematurely. Such seemingly small things as eating out less often and reducing optional spending will help you be prepared for living on less.

Consider Who You Are Bank Rolling

Resist the temptation to sacrifice your retirement security to pay for your kids’ college. When the offspring walk off with a diploma, you may find yourselves in the mid-50s. In some instances, the kids go into careers debt-free, but Mom and Pop suddenly find they are facing retirement without an adequate cushion. Although the urge to help the children get a higher education is hard to resist, if it isn’t financially feasible it may mean that those children will be called on to help you make it through retirement. Alternatives are paying only a pre-determined portion of the higher education costs or encouraging your students to get their education at a state or community college, if possible. Look ahead when they are still in public school. Save if you can while children are small to help alleviate the stress when you are suddenly faced with tuition and other costs. Encourage the kind of scholastic achievement that can lead to scholarships and other assistance.

Recognize Your Limitations

Don’t be fooled into thinking you will live forever. The plans you made for retirement can quickly go awry if one of the partners dies before you expected he or she would. Many a widow, particularly if there are still children at home, has been forced to sell the family home and retrench spending to the point of penury. Term life insurance for both partners is the most feasible way to avoid this kind of financial shock. Finding out the hard way that you are under-insured is a double-whammy for a surviving partner mourning a loss. A will should be prepared well before anything but a tragic accident could be expected to take either of the partners. Both spouses should be well informed about family financial realities and decisions should be made, as nearly as possible, well in advance.

Charting a course for something as tenuous as retirement is tricky, but those who are realistically preparing for the eventuality will be least likely to find themselves swamped when it comes.

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In the past five years, job losses in the United States have given people incentives to start their own businesses. These self employed people have become successful financially and have never really been forced to think about how they are going to manage paying their own taxes. With additional money coming in, they need a tax strategy to help them plan for retirement.

The formula they might use in saving for taxes needs to benefit them the most in the long run. You could use the strategy of saving 25%-35% and just leaving the money in a savings account. This will earn you very little interest over the course of a year.

One very good tax strategy is to set up an account that is established as Self Employed Pension or SEP-IRA. These accounts will provide you a reduction in your net earnings and allow your money to grow through investments.

So what is a SEP-IRA? A SEP-IRA is an account set up at banks, insurance companies or financial institutions. You are allowed to make cash contributions up to a set limit per year. You need to check with your tax specialist about the amount limits for your situation. For 2011, the contributions cannot go over $49,000.

When you lower your net earnings from your business, you lower your tax liability. The net earnings from your business is your gross income minus allowable business deductions. This determines your taxable income. Contributions to SEP plans are an allowable deduction.

Setting up this type of account helps you in two ways. You reduce your net earnings and you are able to start contributing to your own retirement plan. Both of these benefits can save you thousands of dollars in the long run and with a good investment strategy for your cash contributions, you stand to earn money on your investments over time.

If you are new to being self-employed and want a good strategy to help you build your assets, consider using an SEP-IRA. You can set these up and contribute to them up until the date your taxes are due. Discuss this tax strategy with your tax preparer and determine if this would help your personal tax situation.

This article is meant as a guide for your education. Please counsel with your tax preparer before taking any action. For the government description of SEP-IRAs, please visit: http://www.irs.gov/pub/irs-pdf/p560.pdf

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