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10.2 Saving and Planning for Your Retirement

To qualify for a traditional IRA deduction, you must not have access to a 401(k) retirement
account through your place of employment. In addition, the maximum allowable contribution
is subject to certain income limitations. For example, if you are single, do not have a 401(k)
through your employer, and you make less than $60,000 per year, you can make the full con-
tribution ($5,500 as of 2016). If you are 50 years old or older, you can add an extra $1,000 to
your eligible contribution as a “catch-up” for older Americans. The IRS adjusts the maximum
allowable deduction to account for inflation, and thus the amount is different each year. You
can contribute to a traditional IRA even if you have a 401(k) at work, but the amount is not
deductible and you are still subject to the income limitations.

Roth IRA

With a Roth IRA, you make your contributions with after-tax income. The maximum amount
allowable is the same as for the traditional IRA ($5,500 as of 2016), with annual adjustments
for inflation. You can also add an extra $1,000 contribution if you are age 50 or older.

The beauty of the Roth IRA is that you can still make contributions regardless of whether you
have a 401(k) at work. In addition, you will not be taxed on the money when you withdraw
your funds. If you want to start a Roth IRA, contact your local bank or an investment company
such as Vanguard, Fidelity, or Dreyfus, all of which can help get your Roth IRA started. There
are advantages and disadvantages to both, many of which depend on your own personal cir-
cumstances. The following comparison should help you determine which one might be right
for you: http://www.rothira.com/traditional-ira-vs-roth-ira. To determine how much you
need to save for retirement, try out the calculator in A Closer Look: How Much Do I Need to
Save for Retirement?.

A Closer Look:
How Much Do I Need to Save for Retirement?

As an exercise, you can input your own variables into a retirement calculator (http://www
.retirementcalculator.biz) to see how much you need to save by the time you retire. Be good
to the older you, and start saving for retirement early. Knowing the amount you need will help
motivate you to save and give you a measurable goal.

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