24 Aug She doesn’t have a workplace retirement plan. How can she save?

Q. My daughter works for a non-profit small company with less than 25 employees so she cannot be part of the New Jersey Secure Choice savings program. What other ways can she save for retirement?
— Trying to help

A. We’re glad to hear your daughter wants to save for retirement.

If she was considering the New Jersey Secure Choice savings plan, it is safe to assume there is no other company sponsored plan, so any savings would be through self-funded options.

There are two types of Individual Retirement Accounts, or IRAs, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

There’s the traditional IRA and the Roth IRA.

Let’s go over the differences between the two,

A traditional IRA provides for a tax deduction today, Sarnecki said.

“The earnings grow tax-deferred, but future distributions are taxed 100% as ordinary income,” he said. “An example would be if someone earned $50,000, and contributed $5,000 to a traditional IRA, they would only be taxed on $45,000 worth of income.”

A Roth IRA does the opposite.

The contribution is made with after-tax money, and when a distribution is taken in the future, it is 100% tax-free, assuming the account was open for five years and the person was 59 1/2 years old, Sarnecki said.

In the same example as above, the individual would have the full $50,000 of earned income taxed, he said

Both come with limits regarding who can contribute, and the amount they can contribute, Sarnecki said.

For this purpose, Sarnecki said he will assume that your daughter is married, because if she is single, she has no limitations because her company does not have a plan.

So if she is married, and her spouse’s company does not have a retirement plan, income limits do not apply when contributing to a traditional IRA, he said.

Your daughter can contribute $6,000 — $7,000 if above the age of 50 — and receive a full tax deduction, he said. Her spouse can contribute as well.

“Even if her spouse does not work, they can contribute via a spousal IRA. The same contribution limits apply,” he said. “In this case they can contribute $12,000 total, or $14,000 if above age 50.”

If her spouse had a plan at work, they would be subject to certain income limits and phase-outs, he said.

· $105,000 to $125,000 – Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan.
· $198,000 to $208,000 – A taxpayer not covered by a workplace retirement plan married to someone who’s covered.

For a Roth IRA, the maximum contributions are the same. The only difference is that income limits do apply. The limits and phaseouts for 2021 are as follows:

· $125,000 to $140,000 – Single taxpayers and heads of household.
· $198,000 to $208,000 – Married, filing jointly.
· $0 to $10,000 – Married, filing separately

Outside of a traditional or Roth IRA, one may save through an individual investment account, Sarnecki said. Keep in mind, though, these accounts are taxable and subject to interest, dividends and capital gains, unlike the IRAs which grow tax-deferred, he said.

“If she is looking to save more than the allowable contribution amounts within the IRAs and is looking for tax deferral, a non-qualified annuity could be an option,” he said. “Non-qualified annuities have several moving parts, such as surrender charges and taxation — ordinary income versus capital gains — and should be reviewed in detail to determine suitability.”

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This story was originally published on Aug. 24, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.