Announcer:
It is time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker-dealer member, FINRA, SIPC, investment advisor representative, Cambridge Investment Research Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink bringing you Today’s show had a little change in schedule. This is the first show in August and normally David Nelson does the half-hour live segment the first Wednesday of each month, had a little change in scheduling, so he was on last week and we will continue on this week with the abbreviated show getting into today’s program. It is hard to believe that I did say that, that we are into August already. It seems again, July just continues to fly by. It seems each year you get through that 4th of July weekend and boom, before you know it, we are in August and starting the back-to-school shopping. I am seeing that it’s about, for some of the area schools is just a couple of weeks away, so that’s going to be on us rather quickly.
Again, it’s hard to say that and kind of realized where the summer has gone as it’s definitely came and went even faster as it seems and in years past and hopefully everyone had an enjoyable summer with it and going to get to enjoy the last couple of weeks before, again, good or bad, kids are back in school and getting into their regular schedules and all that stuff with it.
And exciting time though with fall sports kind of getting into the preseason, I guess you would say. A lot of football camps, volleyball camps, some of those seasons are gearing up for what they say, college football is right around the corner and they’re starting to count down to first weeks. So again, it is moving right along. Fall will be here before we know it, and a little warm taste of temperatures this weekend. But all in all a great time of the year.
So with that, for today’s program, I know we’ve talked a lot as far as retirement planning and people transitioning from working into retirement, social security, again, Medicare taxes when some of those programs during the month, but wanted to reach back a little bit and just kind of go to the very beginning and those younger individuals who may be just starting their first-time job, transitioning out onto their own, getting a job, how that means and what they should maybe be looking at for I guess their future. And we’ve talked a lot as far as the pension plans that employers have that unless you are a public official work for a school system, those pension plans when you walk off the job are very few and far between anymore. And the importance of saving for your retirement and looking to have a little savings for retirement fall solely on the employee now, to again start that.
And when you look at saving for retirement, we always say that we’ve never had anybody that came in as they went into retirement and said that they saved too much or they started too early. It’s obviously the opposite of that. They wish they would’ve saved just a little bit more, and they wish they would’ve started a little bit earlier. So for those younger individuals that are just transitioning into a job who maybe become eligible for their employee employer retirement plan there or else if they’re not yet eligible for it because they’re working part-time, but yet now they have some earned income looking to save, it’s important for them to have just a basic understanding as far as the different types of savings and what it means for them from a tax standpoint and not just today, but again, 30 years, 40 years down the road and what that potential may be.
And again, the big difference is if you are eligible to contribute to a employer-sponsored plan and there is any type of a match that that employer is willing to give, that needs to be the very first spot that you start saving. If they’re willing to match 3%, 4%, 5%, whatever the case it may be. Again, you want to make sure at all possible that you are putting in at least the amount that they are going to match. So again, if they’re going to match 5%, then find a way to put in 5%. That dollar match basically that they’re going to put in for you is again, additional money that will just continue to build up your retirement savings.
So again, for anyone starting out that has access to an employer-sponsored plan, your first thing to look at, is there a match and if so, what is it? And try to find out a way to put up to that match into your retirement savings. If there isn’t a match or if you’re not yet eligible for it, but yet you have earned income. Again, now the question becomes where do you look at savings? And we focus on Roth accounts, IRA accounts when again, when your income falls in the level that you’re able to do that, you have earned income, putting money into an individual retirement account or a Roth individual retirement account.
Now again, the main differences with these is again, how the money is taxed. If you put money into a tax deferred IRA account, you get a tax deduction for every dollar that you put in the year that you put it in. So again, if you put in $100 a month, you will have a tax deduction, lowering your income on your tax return for $1,200. 100 each month equals 1200. Again, that’s what your deduction would be on your tax return.
So again, that tax savings is as good in the year that you put the money in. It is going to lower your tax taxable income in that year. However, what you are doing is you are just deferring that tax to an unknown period of time. So again, we don’t know what taxes are going to be like sometimes in the next year ahead, let alone 20 years, 30 years, 40 years in some cases down the road as far as what those taxes will be. The other trade-off is because that money is tax deferred, anything that you make inside of that account when you take it out will become taxable to you. So again, yes, you get that deduction upfront that year that you put the dollar in, you are going to have that savings, that deduction on your tax return. However, you are just deferring the tax and any money that money grows to you are deferring the tax on that money as well until you take it out down the road.
On the flip side of that is the Roth account. The Roth account is kind of the opposite In the tax you put that dollar in, there is no deduction when you put it in, it is after-tax money. It’s a dollar that has already been taxed to you. You make that dollar contribution. Again, there’s no tax deduction on your tax return for that year. The trade-off is that that money is essentially tax-free then. So again, that money grows to whatever it becomes inside of that account. Again, as long as that money stays in there and there’s no distributions of the earnings from those contributions prior to age 59 and a half, 100% of that money comes out tax-free to you. So again, you’re putting money in, it is continuing to grow. Again, as long as those distributions of the contributions don’t come out prior to 59.5, if they come out during your retirement there after that age, again, they will be tax-free to you.
So again, there’s differences to look at it when you’re deciding on where to make those savings, where to make those monthly contributions if that’s the way you have set it up. And again, you start looking at things in the power of compounding interest where money that you’re making is now making money, is now making money on top of that. And again, you start looking at it compared to a Roth to an IRA account. Again, having that money potentially be tax-free as long as there’s no early distributions is a very powerful thing, and it sets you up as you transition into retirement when you get to that phase of your life in a pretty solid standpoint to be able to have bucket of money that you can access without impacting your taxes, that is going to be tax-free to you.
The other trade-off with that is there is no required minimum distribution or RMD on Roth accounts. So again, when you get to age 73 or 75, whatever age that it is when you get there, depending on when you were born, there’s not a required amount that you have to take out each year. So again, it is looking at understanding the differences between those two, the tax deduction now, versus the tax-free growth versus having tax-free income in retirement. Again, if you are in a very high tax bracket now and will potentially be in a lower tax bracket in retirement, it may make sense to go the other way to take that deduction. That deduction will be worth more to you by lowering your income in higher taxed years than what you will take it out to later on when you may be potentially in a lower tax year. So again, there’s a lot that goes into that as far as deciding when to do it, how to do it, and again, the tax savings is a big implication as far as driving that decision on where you should make those contributions.
A lot of 401(k) plans now are becoming more popular where they do include a Roth 401(k) component. So again, understanding what is available to you, what your options are, and then again, the decisions as far as from a tax standpoint, do I go pre-tax? Do I go after tax? Do I take the deduction now or take the tax-free nature of what it does? So a lot of things that go into it, but again, the most important thing is just start saving. Be able to pay yourself and to get that ball rolling in a positive way for you.
So if you’ve got questions, give us a call. We’d be happy to kind of walk this through with you a little bit more to your individual situation. But again, start saving. I don’t think you’ll regret it.
So before I do run out of time, I did want to mention that every Friday, Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the Midwest Pets for Life here in Clinton. Again, this is Nate Kreinbrink bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker-dealer member, FINRA, SIPC, investment advisor, representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.