What Are My Retirement Plan Options?

Thirty-six percent of Americans don’t have any savings for retirement. If you have taxable income but your employer doesn’t offer a retirement plan, you need to ask yourself: What are my options?

myRA

The U.S. Treasury Department introduced the myRA last year as a simple, no-fee “starter” retirement plan.

To participate, you must earn less than $129,000 per year for individuals, and $191,000 for married couples filing jointly. You can make after-tax contributions of up to $5,500 per year. Individuals who will be 50 years of age or older at the end of the year can contribute up to $6,500.

You can’t deduct your contributions, but any qualified withdrawals you make will be free of income taxes. “Qualified” withdrawals occur after age 59 ½ and five or more years after you made your first withdrawal, or after you become disabled. As with nearly any qualified retirement plan, you will pay income taxes on any gains and an additional 10 percent penalty on any non-qualified withdrawals.

With a myRA, all funds go into U.S. Treasury securities. Treasury says “…the account carries no risk of losing money.” That may be true, but low-risk usually means low-growth.
The myRA account can have a balance of up to $15,000 or lower for up to 30 years. When either of these limits is reached, you must transfer savings into a private-sector Roth IRA.

Advantages

• No minimum contributions make it easy for young and low-income savers to commit.
• No fees.
• No fees.

Disadvantages

• Must have direct deposit through employer.
• Low growth potential.
• Fairly low maximum annual contributions.
• Low maximum account balance.
• Not available to higher-income individuals.

Choice #2: Traditional and Roth IRAs

Anyone with taxable income can set up an IRA (individual retirement arrangement or account) with a bank, life insurance company, mutual fund or stockbroker. You can set up an IRA whether you have an employer-sponsored plan or not.

Traditional and Roth IRAs have the same contribution limits. For 2015, you can contribute up to $5,500. Individuals aged 50 and over can make an additional catch-up contribution of $1,000.

You can deduct contributions to a traditional IRA from current income. However, if you also have a workplace retirement plan, your ability to deduct contributions begins to phase out once your modified adjusted gross income (AGI) exceeds certain limits. When it reaches the top of the range, your entire contribution will be taxed. With a traditional IRA, you are also taxed when you make withdrawals after retirement at your then-current rate. This means higher-income individuals could be double-taxed—something you want to avoid!

With a Roth IRA, you make contributions with after-tax dollars, but you receive qualified withdrawals tax-free. If you don’t think your tax rate will decrease in retirement, you might consider a Roth IRA.

Once your income exceeds a certain AGI, you can no longer make contributions to a Roth IRA.

Advantages

• Available to individuals with no employer plan.
• Flexible: you select the institution that holds your funds and how you invest them.
• Tax-free growth.

Disadvantages

• Fairly low annual contribution limits.
• You must have taxable income to open an account. Not an option for retirees. Non-working spouses can have an IRA if their spouse has taxable income.

Choice #3: Annuities

An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. People typically buy annuities to help them manage their income in retirement.

There are two phases to annuities, the accumulation phase and the payout phase:

• During the accumulation phase, you make payments that may be split among various investment options. In addition, variable annuities often allow you to put some of your money in an account that pays a fixed rate of interest.
• During the payout phase, you get your payments back, along with any investment income and gains. You may take the payout in one lump-sum payment, or you may choose to receive a regular stream of payments, generally monthly.

You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time. As with life insurance, the insurer will price your annuity according to your mortality risk. Unlike life insurance, your costs typically increase the longer your life expectancy, since the potential payout period will be longer.

Advantages

• Available to people who’ve contributed the maximum amounts possible to an IRA or 401(k) plan.
• No annual or lifetime contribution limits.
• Can be set up to provide guaranteed income.
• Can be set up to provide lifetime income.
• May offer tax advantages.

Disadvantages

• You must make a minimum contribution to open an account, which varies by company and type of annuity.
• If you buy a variable annuity, your investment could lose value.
• Most retirement accounts (including IRAs and employer-sponsored 401(k)s) charge administrative fees and pass on underlying fund expenses. Annuities often have an additional mortality and expense risk charge, which pays the issuer for the insurance risk it assumes under the annuity contract. You might also pay additional fees for special features you select, such as a guaranteed minimum income benefit or long-term care insurance.