According to a report produced by the U.S. Bureau of Labor Statistic, 67% of private sector workers had access to some type of retirement plan in March 2020. Of the 67%, fully 52% only had access to a defined contribution plan (i.e. 401k, 403b, etc.), 3% only had access to a defined benefit plan (i.e. traditional pension plan), and 12% had access to both a defined contribution and defined benefit plan. However, looking at these statistics, it shows that fully 33% of workers in the private sector still may not have access to any type of retirement plan through their employer. If you are one of the 33% who doesn’t have access to a retirement plan through your employer or maybe you are self-employed, there are other types of accounts to consider. In this blog post we will focus on traditional and Roth IRAs. In our next blog post, we will look at a few other account types.
Traditional or Roth IRA
If you are looking for a place to start saving for retirement, a traditional or Roth IRA would be a good place to look first. They allow individuals under the age of 50 to contribute up to $6,000 in 2021. For people over 50, they can contribute an additional $1,000 in 2021 for a total contribution of $7,000. The difference between traditional IRAs and Roth IRAs is how contributions are made. Typically, contributions to traditional IRAs are made on a pre-tax basis, the money in the account remains tax deferred, and then withdrawals are subject to ordinary income tax. Roth IRA contributions are made with after tax dollars and then, provided certain requirements are met, earnings are potentially tax free upon withdrawal. Keep in mind that to be eligible to make a Roth IRA contribution, you must meet certain requirements (namely, your modified adjusted gross income must be below a certain threshold). Traditional IRAs don’t impose income restrictions on eligibility to make contributions, however, whether or not your contribution will be tax deductible will depend on a few different factors. A qualified tax or financial professional can help answer questions such as if you are eligible to contribute directly to a Roth IRA or not, whether or not your traditional IRA contribution will be eligible to be tax deductible, and go into further details about the pros and cons of traditional vs. Roth IRAs and which account type may be most appropriate given your individual situation.
What’s nice about traditional or Roth IRAs are that they are eligible to be set up by the individual themselves with no need to be tied to an employer. Also, depending on whichever custodian you choose to open your IRA account with, you potentially have a wider variety of investment options than you would typically have with a workplace retirement plan.
Also, if you are a married couple (who file taxes jointly) and one spouse doesn’t work, you may be able to take advantage of a spousal IRA for the non-working spouse provided you meet certain eligibility requirements. A spousal IRA is simply a Roth or traditional IRA established in the name of (and wholly owned by) the non-working spouse. Normally to contribute to an IRA you must have earned income from employment of some type. However, with a spousal IRA, the working spouse can make a contribution based on their earnings to an IRA account established for the non-working spouse (who doesn’t themselves have earned income). Let’s look at a hypothetical example to help illustrate this: Bob and Sally are a married couple and are both 35 years old. Bob is a stay-at-home dad currently and Sally is the primary breadwinner earning $100,000 per year. Based on Sally’s salary, she could contribute up $6,000 in 2021 to her own traditional or Roth IRA and she could contribute up to $6,000 to a Roth or traditional IRA owned by Bob. Keep in mind that you can only contribute up to the annual maximum per spouse’s IRA account (in 2021, $6,000 for those under 50, $7,000 for those over 50) or up to your total earned income for the year, whichever is less. So, in the above example, if Sally only made $10,000 working this year (not $100,000) then she could only contribute up to $10,000 total between her own IRA and her husband’s spousal IRA (maybe she contributes the max $6,000 to her own account and $4,000 to Bob’s IRA as an example). Whether or not contributions to a spousal traditional IRA (not a Roth) are tax deductible will depend on if the working spouse has a retirement plan offered through their employer and if household income is below a certain threshold. Again, a qualified tax professional can help you determine if contributions to a spousal traditional IRA would be eligible to be tax deductible or not given your individual situation.
Another consideration is the phased rollout of CalSavers to workers in California. CalSavers is a program being run by the state of California aimed at employers who don’t currently offer their employees access to a workplace retirement plan. By June 30, 2022, employers with 5 or more employees who don’t offer an alternative workplace plan to employees are going to be required to opt into CalSavers. The program is essentially a Roth IRA (and has all the same contribution and income limits as mentioned above). However, the program allows for workers who want to participate the ability to establish an account easily (as it will be facilitated through their employer) and contribute via payroll deductions. Lastly, because CalSavers is simply a Roth IRA, if you have a Roth and/or traditional IRA elsewhere, you total annual contribution to all Roth and traditional IRA accounts in your name in 2021 is $6,000 ($7,000 if you’re older than 50) maximum between all accounts.
Having a workplace retirement plan, especially if there are employer matching contributions, is a great benefit. But if you are one of the 33% who do not have access to a plan then you still have opportunities to accumulate retirement assets on your own. If you do have access to a workplace plan, it usually is a good idea to look to maximize contributions to that plan before looking to do outside independent plans on your own. Talk with a financial professional to evaluate your individual situation.
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.