In the ambit of employee finance, retirement savings occupy a central role. Time is very relevant in this regard because with the recession, people had to either dip into their savings or change jobs.
Without doubt, the post-recession has resulted in corporations and even government bodies eliminating defined benefit retirement plans in favor of defined contribution plans. This means that the responsibility regarding retirement savings should now be given greater importance. More specifically, concerned individuals should be able to phase out retirement savings.
Phasing Retirement Savings
In order to overlap employee finance and retirement phases, three distinct age brackets can be drawn. First is the pre-retirement phase which covers years before 59 ½. Next are years between 59 ½ and 70 ½, which can be considered as the transitional phase. Finally, there is the complete retirement phase following 70 ½.
From the employee finance point of view, a rookie mistake is not contributing enough to the defined contribution plan, which would translate into the maximum employer contribution. This is important because a large number of businesses match employee IRA contributions to a certain amount of gross income.
Additionally, there are cases in which places of employment change policies. In such cases, 401 (K)s have limitations that can be overcome by opting for Roth IRA or Rollover IRA. These plans have the key advantage of allowing an individual to take control over his/her retirement savings. Furthermore, there is also no limitation on the distribution of retirement assets.
Benefits of Conversion
The rollover makes sense on the account that there would be no loss of employer contribution. The earnings, dividends, as well as the capital increases, are tax deferred. There are no mandatory distributions, allowing better control over employer finance.
Also, there is a lot of investment diversity when it comes to certain sponsors and retirement accounts such as Roth IRA or Schwab IRA. However it should be noted that withdrawals from a traditional IRA are taxable at ordinary income tax rates since there were no income taxes paid on the deposits originally.
Moreover, after the passage of 5 years, there are no restrictions on withdrawals. Not only does this cater to employee finance, it carries benefits for the spouse of the recipient. The spouse or the beneficiaries of Roth IRA would not have to pay taxes on the money that they inherit. Therefore, it also works as a long term strategy.
The analysis provided above is important because stats show that employees now have a lesser tendency to save more for retirement compared to 10 years ago. According to a study done by the Employee Benefit Research Institute, at least 60 percent of employees surveyed reported that they had less than $10,000 set aside for retirement. This amount doesn’t include the retirement benefit plans.
Managing a nest egg is developed on the principle that saving should start early. Normally, in lieu of modern finances, employees in the age bracket of 25-34 prioritize expenses such as debt management, and retirement savings takes a backseat.
However, because of the diversity of financial products, as well as the flexibility of IRAs, retirement savings can be managed side by side with other expenses. This allows financial security in a time when expenditures have to be squeezed.