What’s scarier than the uncertainty of your future? The uncertainty of your money in the future. It may be this fear that drives people to neglect their retirement plan, or even ignore it altogether.
According to a report by the Economic Policy Institute, 1 in 3 Americans has $0 (!!) saved for retirement. Similarly, the median savings for all families in the U.S. is only $5,000.
Knowing these statistics, you can see it is highly likely your employees are not saving enough. But how do you get them to save more? The first action you can take is to set up a company retirement plan, such as a 401(k). Still, these plans are not the end-all-be-all.
The median amount in a 401(k) savings account is $24,500, according to a recent NerdWallet article. While this is markedly improved from the $5,000 overall median, it is still nowhere near enough.
Here’s where IRAs come into the picture. Individual retirement accounts (IRAs) can help bridge the gap that many employees face between their desired retirement income, and what they are currently saving (or rather not saving).
What is an IRA?
An IRA is a tax-sheltered retirement account set up at a bank, investment firm, or insurance company. These accounts can be made up of mutual funds, stocks, bonds, bank deposits, and other types of investments.
It is important to note that an IRA is not an investment itself. Rather, it is a basket in which you keep these stocks, bonds, and other assets. Your employees also need to be aware that there are eligibility restrictions to every IRA based on your income and employment status.
Depending on the type of IRA the individual chooses, there are different tax advantages to these accounts. It is important that your employees understand the differences in the various types of IRAs, to make the best decision for themselves.
Types of IRAs
There are 11 total different types of IRAs. For the purpose of this article, we will stick to the main three. Those three are traditional, Roth, and rollover accounts.
1. Traditional IRAs
Traditional IRAs are the most common form of IRA. Contributions to traditional IRAs can be made on a pre-tax basis. These contributions reduce your gross income, which reduces your overall tax burden (meaning you will owe less in taxes at the end of the year).
Both your contributions and any earnings for your account grow tax-deferred until the funds are withdrawn. For this year, 2017, an individual can contribute up to $5,500 between all of your IRAs. If you’re age 50 or older, you can contribute an extra $1,000, for up to $6,500.
You can withdraw funds from a traditional IRA, penalty-free, at age 591/2. In fact, you must begin to withdraw money from your account by the age of 701/2. Otherwise mandatory minimum amounts will be withdrawn throughout the year.
Conversely, you will be subject to a 10 percent penalty if you make a withdrawal before age 591/2. Traditional IRAs can be converted to Roth IRAs, but you must pay income taxes on all funds. Although, you do not have to pay any tax penalties for doing so.
2. Roth IRAs
Roth IRAs, like traditional ones, offer employees a particular set of tax incentives. Though, the tax incentives are mostly different than traditional accounts. The first advantage is that all earnings and the principal are tax-free.
This advantage; however, is also a Roth IRA’s biggest disadvantage. Annual contributions are not tax deductible, which means that you pay income tax on any contributions to your Roth account.
Still, because of this tax, all earnings and your principal are 100 percent tax-free. Unlike traditional accounts, principal contributions to Roth IRAs can be withdrawn at any time, without any penalty, as long as the required 5-year holding period is met.
Another difference in a Roth IRA is that you must make under a certain amount of money, to make contributions. These income limits, per the IRS, are:
| If your filing status is… | And your modified AGI is… | Then you can contribute… |
| married filing jointly or qualifying widow(er) |
< $186,000 |
up to the limit |
|
> $186,000 but < $196,000 |
a reduced amount |
|
|
> $196,000 |
zero |
|
| married filing separately and you lived with your spouse at any time during the year |
< $10,000 |
a reduced amount |
|
> $10,000 |
zero |
|
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year |
< $118,000 |
up to the limit |
|
> $118,000 but < $133,000 |
a reduced amount |
|
|
> $133,000 |
zero |
3. Rollover Accounts
A rollover IRA is a traditional IRA set up to receive a distribution(s) from a qualified retirement plan. The big advantage of a rollover IRA is that it is not subject to any contribution limits.
This lack of contribution limits allows any employee to distribute money from a previous employer’s retirement plan, into their own individual account. Additionally, these distributions may be eligible for subsequent transfer into a new employer’s qualified retirement plan, at a later date.
It is worth noting that you can roll multiple qualified retirement plans into one IRA. If you have retirement accounts at three different past employers, you can roll all of them into one single account through your IRA provider.
Benefits of IRAs?
There are multiple benefits to having an IRA, even if you already contribute to your workplace retirement account. The first reason to have an IRA is that it allows you to diversify your investments.
There are many more investment options when choosing your IRA investments, as opposed to a company-sponsored retirement plan. Similarly, IRAs, because they are your own, give you more control. Through an IRA you can choose when, where, and how you invest your money.
These benefit can improve your employees’ savings. Improved savings lead to better financial wellness. Better financial wellness can boost employee engagement and productivity.
This financial wellness is important because financial stress is both very real and very powerful. According to a survey from the International Foundation of Employee Benefit Plans, financial stress has a real impact on employees.
The study found that those reporting high levels of stress were twice as likely to report poor overall health, increased absenteeism, and decreased productivity.
The Wrap
If your company offers a qualified retirement plan it’s a great idea for your employees to contribute to their account; especially if there is any sort of employer match. Still, these plans don’t have to be your workers’ only investment accounts.
Individual retirement accounts are a terrific method for employees to diversify and gain more control over their investments. In turn, your company gets a staff that is less likely to fall victim to the negative effects of financial stress.
So when it comes to saving for retirement; get an IRA before you get IRAte.