11 May Picking the right retirement plan

 Q. I have absolutely no investments for retirement, and I don’t have a 401(k) plan at work. What’s the best way to save?

A. We’re glad to hear you want to get started.

There is no one right answer, but here’s what you need to know to make a smart decision.

First, make sure you have enough money to save.

“The first rule for retirement savings is you have to spend less than you make,” said Bernie Kiel, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. “If you spend 100 percent of your earnings you have nothing to save for the future.”

So we’ll assume you’ve got some cash to set aside.

Kiely said you now have to decide if you want to save in a tax-deferred retirement account or if you want to put after-tax money into an account.

After-tax accounts offer no immediate tax savings and your gains will be immediately taxed going forward. That’s what makes tax-favored accounts such as traditional IRAs and Roth IRAs great tools for long-term savings.

For either of these accounts, you can contribute the lesser of $5,500 ($6,500 if you are over 50) or your earned income, Kiely said.

“Earned income comes from salaries, wages or self-employment income. Earned income excludes interest, dividends and capital gains,” he said. “There is no age limit for a contribution to an IRA as long as you are under the age of 70½.”

When comparing between these two accounts, understand that when you eventually take withdrawals from Roth IRAs, the money will be tax-free, but a traditional IRA may allow you to take a deduction for your contribution on your tax return.

You said you have no investment for retirement and no 401(k) plan, so you can deduct your IRA contributions, Kiely said. If you participated in some sort of retirement plan at work, you can deduct your contributions if you made less than $60,000 ($96,000 married filing jointly), he said.

“Let’s assume you are 25 years old and you put $5,500 into a Roth IRA. When you hit 50 years of age you increase your contribution to $6,500. You do this every year until you are 70 years of and you earn an average return of 8%,” Kiely said “You would have amassed $2.4 million. That’s the benefit of time and compound interest.”

Also know that while traditional IRAs have a required withdrawals when you reach 70 1/2, Roths have different rules.

Before you jump to either account, understand the limitations you may face depending on your income. You can read more about that here.

If you’re married, your spouse can also make the same contribution even if he or she doesn’t work.

While IRAs are popular options, they’re not the only choices.

There’s also the MyRA, a new type of Roth retirement account that was created by the Treasury Department in 2014.

“Investors who earn less than $129,000 for individuals and $191,000 for married couples can save $5,500 per year, up to a maximum account balance of $15,000 in a MyRA, where it will be invested in government securities that are guaranteed not to lose value,” said Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Oakland. “MyRAs are funded with after-tax dollars via direct deposit through an employer.”

You said you didn’t have a 401(k) plan at work, but you weren’t clear about whether you have an employer or if you’re self-employed.

If you run your own business, you should also consider a Solo 401(k).

This is a one-person 401(k) plan that’s also called a Uni-K or individual 401(k).

“This plan allows you to make tax-deductible contributions to a Solo 401(k) of $18,000 — $24,000 if age 50 or over — in 2015, plus 20 percent of net self-employment income up to $53,000 (or $58,000 if 50 or older) or the amount of your freelance income for the year, whichever is less,” Viscuso said.

You can learn more about other self-employment retirement options here.

Email your questions to .

This story was first posted in May 2015.