Before investing it is necessary first to ensure you have an adequate emergency fund and you have paid off any unnecessary credit cards or high-interest consumer debt. If you are single or married with one income, it is recommended that your emergency fund is sufficient to meet six (6) months of living expenses. If you are married or have two sources income three (3) months of living expenses in an acceptable amount for your emergency fund.
Once these first two criteria are met by reducing debt and saving for and emergency fund, you should contribute to your employer-sponsored retirement account and individual retirement accounts. Examples of a employer-sponsored retirement plans include: 401(k), 403(b), 457 and TSP’s. If you do not have the opportunity to contribute to an employer-sponsored retirement account or you have additional reserves, you may contribute to an Individual Retirement Account (IRA). There are two main types of IRAs, Roth and Traditional. Of these two Roth IRAs are subject to income phase-out and are made with after-tax contributions. Furthermore, Roth IRAs are not subject to required minimum distributions when you reach age 70.5, and distributions are tax-free after the age of 59.5. You may contribute to Traditional IRA’s pre-tax, but unlike Roth IRAs, they are taxable in retirement and RMD’s begin for these after age 70.5. That said, if you have funds available after contributing to your company’s retirement plan then you should make it a priority to contribute to you and your spouse IRAs. Limits for individual and spousal IRA contributions are $5,500 to each account or earned income, which is less. If you are over the age of 50, you are eligible to make a catch-up contribution of $1,000, increasing the contribution limit to $6,500.
If you can fully maximize your retirement accounts and have sufficient reserves, you then may contribute to non-retirement accounts, education planning accounts, etc. The rationale for allocating your savings first to retirement accounts then to non-retirement accounts is that you give yourself an opportunity for tax-differed growth while maximizing your savings to accounts that you will need when you are no longer earning income. Furthermore, by eliminating debt and establishing an emergency fund, you will be prepared for an unexpected expense or job loss. For example, imagine if you had not established an emergency fund and unexpectedly had several repairs and medical expenses. Without the emergency fund, you would most likely need to sell your investments for these expenses, whereby most likely creating a tax liability or incur a loss by selling at an inopportune time. This is why the longer your money can stay invested the better it will perform long-term.
Over the years Plotkin Financial Advisors, LLC has worked with individuals and their families creating investing programs that align with their cash flow while helping to prioritize savings strategies. If you have questions on establishing retirement accounts or how you should be investing your savings, please feel free to reach out to one of our advisors today.