Monday, July 28, 2014

Scrimp on Coffee Not Your Retirement Contribution
April 3, 2014 by Staff Report | No Comments

For the past few years, leaner times have forced many individuals and households to juggle everyday expenses and find various ways to trim the family…

For the past few years, leaner times have forced many individuals and households to juggle everyday expenses and find various ways to trim the family budget.

Everything from cutting out specialty coffee drinks and expensive vacations to buying more economical cars and downsized dwellings have been calculated and discussed at kitchen tables across the country.

But when it comes to finding additional areas to cut expenses, don’t make the mistake of scrimping on your tax-advantaged retirement plan contribution. Making your annual contribution to a tax-advantaged retirement plan, including 401(k) and 403(b) plans, can reduce your current income tax as well as allow your account to grow tax-deferred.

According to the 2012 Wells Fargo Retirement Survey conducted by Harris Interactive, Americans say the 401(k) is the “best retirement savings vehicle,” followed by the IRA and a savings account. Thirty-four percent of Americans who have a 401(k) available through their employer are saving between 3 percent and 5 percent in their plan, and 32 percent are saving between 6 percent and 10 percent.

Those contributing to a 401(k) report more companies are offering the match (77 percent) this year versus 66 percent a year ago.

Yet, as much as the tax savings makes sense, when the budget is pinched, you may be tempted to skip your retirement plan contribution this year –?for your own financial well-being, please don’t.

Here are three common excuses for not contributing to your retirement plan this year — and an equal number of counterpoints to suggest why you should.

Excuse #1:My company won’t match my contribution this year.

Counterpoint: Companies that normally match their employees’ contributions to retirement plans may suspend their match in a year when company profitability is under pressure.

The fact is, you compound the gap in retirement growth income if you follow suit and fail to make a current-year contribution.

Excuse #2: We’re trying to put more money in the bank.

Counterpoint: The money you put away in an individual or joint account is after-tax money and the interest earned on the account is also subject to tax.

In a 30 percent tax bracket, it would take $1,428 of pre-tax dollars to equal a contribution of $1,000 in a tax-deferred retirement account. What’s more, that doesn’t account for the taxes you’d pay on interest earned in your taxable account.

Excuse #3: I’ll catch up on retirement savings next year when the economy improves.

Counterpoint: If you normally contribute the maximum contribution limits, you will not catch up. The maximum amount you can personally contribute to a 401(k) plan is $17,500 in 2013 on a pre-tax basis. If you are older than 50, you can also make a catch-up contribution up to a maximum of $5,500. Just keep in mind that once you miss making a maximum annual contribution, you cannot make it up due to annual contribution limits.

No more excuses: Think about making your retirement plan contribution and err on the side of retirement preparedness. Skipping out on retirement contributions now can make it difficult if not impossible later to go back and make up the shortfall.

This article was written by Wells Fargo Advisors and provided courtesy of Terry R. Campbell and Susan Paolo, Financial Advisors in Chardon at 440-286-2553.

Investments in securities and insurance products are: NOT FDIC-INSURED / NOT BANK-GUARANTEED / MAY LOSE VALUE

Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

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