Retirement Savings 101 for Women
Amy Fisher Urquhart, CPA
Now that children are back in school and fall is in the air, we need to make time to evaluate our savings before the holidays arrive. With this in mind, it seems like a good time to address the unique financial challenges women face, particularly in regard to saving for retirement.
Women face a unique set of financial challenges due to earnings, life expectancy, temptations, investment strategies, and career interruptions.
- Women in general receive half the average pension men receive.
- Women are more likely to suffer job interruptions and other income setbacks. The typical man retiring in 2000 had 44 years in the workforce, according to the Social Security Administration. The typical woman had 32 years. Fewer working years means less opportunity to save for retirement and build Social Security Benefits.
- Women typically earn less, although the earnings gap is shrinking.
- Women have a longer life expectancy. The average life expectancy for a newborn girl is 80. For baby boys, it’s 74.5.
- Women are more likely to tap their retirement funds for life changes, such as weddings, new homes, or decorations for a nursery.
To help us get over some of the hurdles of saving for retirement, we all need to make savings a priority.
First and foremost, all of us should be participating in our employer’s retirement plan. As traditional pension plans become less common, more and more employers are offering workers the opportunity to save with retirement accounts. A 401(k) is the most common example of a work-based retirement account, but other types of plans include:
- 457 Plan - Public & Non-Profit Sectors
- 403(b) Plan - Education & Non-Profit Sectors
The money you put in your retirement account is not taxed in the year it goes into the account. It is taken out of your pre-tax wage, then the money grows tax deferred and is only taxed when you take it out.
Contribute as much as you can. The general contribution limits are as follows:
Year Limit
2007 $15,000
2008 $15,500
2009 $16,000
There are special rules to encourage people to catch up on their savings. If you’re at least 50, you can put extra money in your retirement account in addition to the regular contributions. The maximum catch-up contributions are $5,000 for 2007 and 2008.
Take advantage of the company’s match. Make sure you at least contribute the minimum amount in order for the company to match your contributions. Most employers will match a certain portion of the savings you put into an account. For example, your employer may contribute 50 cents for every dollar you contribute up to 6% of your salary.
Saving for retirement if you don’t belong to an employer sponsored retirement plan is just as simple. Anyone receiving compensation, or married to someone receiving compensation, can contribute to an Individual Retirement Account (IRA). Additionally, if you are self-employed, you can start a Solo 401(k), or a Simplified Employment Plan (SEP).
An IRA is a personal savings plan that provides tax advantages for putting away money toward retirement. An IRA is very easy to set up. It can be set up with a bank, savings and loan, credit union, brokerage firm, or insurance company. The institution handles all of the paper work; you just need to decide how to invest your money.
Contributions to a Traditional IRA are made with pre-tax income. Your taxable income is reduced by the amount contributed. The investments grow tax-free and are taxable upon distribution. Distributions must begin by April 1st following the year you turn 70 1/2.
With a few important exceptions, a Roth IRA is essentially a nondeductible Traditional IRA. Roth IRAs are also generally subject to the same rules as Traditional IRAs. For example, the contribution limits for Roth IRAs and Traditional IRAs are $4,000 for 2007 and $5,000 for 2008, with an additional $1,000 catch-up contribution for those age 50 and above.
Despite the similarities, Roth IRAs do have a number of unique features and requirements that you should be aware of when choosing a retirement plan. The most important ones are as follows:
- Contributions to a Roth IRA are not deductible.
- Qualified distributions from a Roth IRA are not includible in income and, therefore, tax-free.
- Contributions can be made to your Roth IRA regardless of your age.
- There are no required minimum distributions that must be made at age 70 1/2.
- Eligibility to contribute to a Roth IRA is subject to special income limits.
A Simplified Employee Pension Plan, commonly known as a SEP IRA, is a retirement plan specifically designed for self-employed people and small-business owners. Most frequently, a SEP IRA is established by a business owner without employees. Contributions to a SEP IRA are tax-deductible and the earnings grow tax free until withdrawn. Up to 25% of compensation, or $45,000 and $46,000 for 2007 and 2008, respectively, can be contributed to a SEP IRA. The deadline for opening and contributing to a SEP IRA is your tax filing deadline, including any extensions. A SEP IRA is easy to set up. The account can be set up at any of the institutions that provide IRAs.
The term Solo 401(k) is commonly used to refer to the Individual 401(k). The Solo 401(k) is available to self-employed individuals and business owners with no full-time W-2 employees, other than themselves or a spouse. The 2007 and 2008 Solo 401(k) contribution limits are $45,000 and $46,000, respectively. A $5,000 catch-up contribution is also allowed if the taxpayer is age 50 or older. Because of the way the contribution is calculated, a larger contribution usually can be made into a Solo 401(k) than to a SEP IRA at the same income level. Therefore, the Solo 401(k) is usually the better option for maximizing retirement contributions and valuable tax deductions while reducing income taxes.
As you can see, there are many retirement savings vehicles available and there are even more that were not covered due to their complexity. Each individual needs to consider their current and future expected tax situation and decide which plan best suits their need. Everyone needs to develop some plan for supplementing their income in retirement, as we cannot count on Social Security benefits alone to meet our needs.
Amy Fisher Urquhart is a Certified Public Accountant and a Certified Financial Planner with WebsterRogers LLP in Florence, SC.