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Saving for your retirement

  • You should start saving for your retirement as early as possible. At least 10-15% of your income should go to some kind of retirement account(s).
  • Your saving rate should be higher or lower depending on your age, and depending on whether you are on track or not for retirement.  It should be higher if you are not on track or if you are only 10 to 15 years away from retiring; lower if you are on track or if you are 30 to 40 years away from retiring.
  • You can invest the money in two types of retirement accounts: Pre-tax retirement accounts and/or post-tax retirement accounts.

Pre-tax retirement accounts
Pre-tax retirement accounts allow you to deduct your contributions from your taxes, meaning that you won’t pay taxes until you withdraw money (during retirement)

401k/403b
A 401k/403b is a retirement account set up by your employers where you can contribute up to $19,000 with a catch-up contribution of $6,000 if you are over 50. The contributions are taken from your salary before taxes. You have a limited set of funds chosen by your employer to invest in. Some employers set up a default investment fund, usually a target fund. It’s a fund that will get less and less risky as you get closer to your retirement date. These funds have dates in their name like 2045, 2050 etc. This date should be close to your predicted retirement age, usually 65. Some companies match your contribution up to a certain limit. They will add money to your retirement account with a specific percentage.  Ideally you should maximize your 401K, but otherwise you should contribute the minimum amount to get the full match from your employer.
Starting at age 70.5, you will have no choice but to withdraw some money, the required minimum distribution (RMD).

Traditional IRA
Anyone can contribute to a traditional IRA. The contribution limit is $6,000 for 2019 with a catch-up contribution of $1,000 if you are over 50. You can only deduct the whole contribution from your revenue if you earn less than $123,000 (married filing jointly with another retirement account) or $193,000 (married filing jointly without another retirement account) and $74,000 (single with another retirement account) or $122,000 (single without another retirement account). Your contribution is in pre-tax dollars so you will pay taxes once you withdraw the money (after age 59.5 years old). If you are over the income limits, I recommend doing a backdoor Roth IRA conversion. Like with a 401k, starting at age 70.5, you will have no choice but to withdraw some money, the required minimum distribution (RMD).

SEP-IRA
SEP stand for Simplified Employee Pension. It’s a retirement account that an employer or a business owner can use to save pre-tax dollars for their retirement. An employer/business owner cannot make contributions that exceed the lesser of 25% of an employee’s compensation/business profit, or $56,000 maximum (for 2019). Like a traditional IRA, you will be taxed when you withdraw money (after age 59.5 years old). Starting at age 70.5, you will have to withdraw money. It’s called the required minimum distribution.

HSA accounts
HSA stands for Health Savings Account. To be eligible for this type of plan, you have to enroll in a high deductible health plan. It allows you to pay for your medical expenses with pre-tax dollars. Why mention this kind of account in an article about retirement accounts? Well, if you are in good health and have enough money and are in a high tax bracket, it can be advantageous to open this type of account.  It would allow you to save for retirement since the money grows tax-free and there is no required minimum distribution. In 2019 the contribution limit is $3,500 for individuals and $7,000 for families, plus an additional $1,000 catch-up contribution for people over 55 years old. Your employer may contribute as well. You will pay 20% penalty if you withdraw money for non-qualified expenses before 65, and pay taxes if you withdraw money after 65.

Post-tax retirement accounts
Post-Tax retirement accounts are accounts where you pay taxes today instead of paying taxes when you withdraw money in retirement.

Roth 401k
A Roth 401k is a retirement account set up by your employers where you can contribute up to $19,000 with a catch-up contribution of $6,000 if you are over 50. The contributions are taken from your salary after taxes. You have a limited set of funds chosen by your employer to invest in. Some employers set up a default investment fund, usually a target fund. It’s a fund that will get less and less risky as you get closer to your retirement date. These funds have dates in their name like 2045, 2050 etc. This date should be close to your predicted retirement age, usually 65. Some companies match your contribution up to a certain limit. They will add money to your retirement account with a specific percentage. If you think your tax bracket will be lower in retirement, you should maximize this account or at least you should contribute the minimum amount to get the full match from your employer.

Because there are no required minimum distributions for Roth 401k, you won’t have to withdraw any money in retirement.

Roth IRA
You will need to be under the income limit of $193,000 (married filing jointly) or $122,000 (single) to contribute to a Roth IRA. The contribution limit is $6,000 for 2019 with a catch-up contribution of $1,000 if you are over 50. Your contribution is in post-tax dollars, so you won’t pay any taxes if you withdraw the money (after age 59.5 years old).
If you are over the income limits, I recommend doing a backdoor Roth IRA conversion.
Because there are no required minimum distributions for Roth IRA, you won’t have to withdraw any money in retirement.

Note: if you decide to contribute to both a Roth IRA and a traditional IRA, your total contribution cannot exceed $6,000.

What accounts to choose?
I usually tell my clients to prioritize maximizing their 401k first, then contribute to a Roth IRA (if their tax bracket is not too high). It’s important to have a combination of accounts in retirement.
Another critical advantage of the Roth IRA is that it will be transferred to your heirs and still grow tax-free for them.

L’assurance vie to finance your retirement
Being specialized in helping the French community, some of my clients have assurance vie accounts in France.

If they plan to retire and go back to France in the next 3 to 5 years, I usually tell them to keep their accounts. Otherwise, I tell them to close their accounts and move the money, for two reasons:

  1. The return on investments of this type of accounts is usually very low compared to accounts they could open in the US.
  2. They lose the tax advantages since they would pay taxes on those accounts here in the US. Most of the time, they would be better off investing their money in a 401k, IRA or Roth IRA.

Merci Guillaume Decalf – Oui Financial www.ouifinancial.com