Business & Real Estate

Saving money in the new year

As the adage goes, it is never too early or too late to save.

While the Bay Area may seem to be the cradle of riches and instant millionaires and billionaires, the country in general has a savings problem. Recent statistics indicate that 50 percent of the baby-boomer population has saved less than $100,000 for retirement, and 37 percent less than $50,000.

If you are not already taking advantage of the following savings options, you should ask yourself why.

Company 401(k)

Many companies offer a 401(k) plan. You can contribute up to $18,000 per year under the age of 50, with a $6,000 catch-up every year after age 50. The amount is contributed from your pre-tax income, thereby reducing your overall taxable income for the year. If you try to tap into the amount set aside before age 59.5, there could be a 10 percent penalty in addition to the taxes you will pay. When you turn age 70.5, Required Minimum Distributions (RMD) start kicking in. That means you must start drawing a certain fraction of the amount every year after you turn 70.5, whether you need or want to or not.

Even if you do not want to contribute the full 401(k) amount if the company offers a match, by all means at least contribute to the level required to get the match. For example, if the company is offering a 5 percent match, then contribute at least 5 percent. If not, you may be leaving free money on the table.

IRAs

• Traditional IRA. If your company does not have a 401(k), then you (and your spouse) can contribute up to $5,500 each year in a traditional IRA you can set up yourself.

• SEP IRA. This one is for self-employed people. You can park up to 20 percent of your income – tax deferred – in a SEP IRA. It is easy to set up and follows the same rules as a 401(k) and other IRAs, including a 10 percent penalty for withdrawal before age 59.5 and the RMD at age 70.5.

• Roth IRA. This type of savings account is funded by after-tax income, based on earned income, and cannot be used if income levels are beyond a certain threshold – $130,000 for single filers, and nearly $200,000 for married filing jointly. The annual limits are $5,500 for under age 50, and $6,500 for above.

While the limits are obviously lower than a 401(k) – and with no instant tax gratification like a 401(k) – a Roth IRA potentially has even better benefits, including tax-free gains and no RMD requirement.

Remember, even if your spouse is not working, contributions for the spouse also may be made if married filing jointly, and if income thresholds are met. Check with your CPA.

Certificates of deposit

If you are one of the lucky few who have thousands or tens of thousands (maybe even hundreds of thousands) of dollars sitting around in bank accounts earning next to nothing in interest, it may be time to rethink your financial plan. With interest rates ticking upward, albeit slowly, several options may be available, and it may be in your best interest to research the matter.

Check bankrate.com to learn which banks offer better interest rates on savings and CDs. While some banks offer higher rates, investigate to ensure that these banks are healthy and solvent. Some larger banks offer higher rates if you go through their online divisions and avoid contact with humans in their organization. Your local credit unions may be an option to consider for better rates.

Some insurance companies offer fixed annuities, which are like CDs but offered by an insurance company rather than a bank. The time frame may be for three to five years, but the rates may be higher. These are not FDIC insured. Do your research in selecting highly ranked companies. A.M. Best is a ratings company that specifically ranks insurance companies. Moody’s and Standard & Poor’s also rank the insurance companies.

Treasury bills (not Treasury notes or bonds) with a duration of one year or less can offer rates north of 1 percent for durations of a few months. Treasury bills are backed by the U.S. government, meaning the default risk is almost nonexistent – hopefully! You can purchase Treasury bills through your online broker or directly from the government through treasurydirect.gov.

Arvind Ven is a Los Altos resident and independent adviser who guides clients through multigenerational financial and retirement planning matters. Email him at This email address is being protected from spambots. You need JavaScript enabled to view it..

Saving money in the new year

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