Question: Is it more beneficial to become incorporated or a LLC in order to reap more benefits for Fortunately, when it comes to retire- ment saving, the amount someone can put away is a function of their income and not business structure. Qualified plan contribution limits are set by the IRS and are directly related by howmuch income someone earns and how old they are with respect to catch-up provisions. The decision to conduct business as an entity rather than as a sole proprietor is more a factor of limiting legal risk rather than taxability. When seeking to make the decision to incorporate or create a limited liability company (LLC) always consult your tax or legal advisor. Question: What is the minimum you should have in reserves before setting up a retirement account? Answer: A cash reserve is something that everyone should have on hand. In a business like real estate, where profes- sionals are likely not receiving the same paycheck every two weeks, I believe it is even more critical. How much reserves someone keeps on hand is a function of their historical business and how conservative they are. Three months of expenses is a good cushion for most. The thing to remember in terms of retirement savings is that you will need this money someday. This is similar to the structure that you have to save money for your potential income tax liability each year. continued on page 20 retirement? Answer:
Answer: Everyone’s retirement goals are different. Whether your plan is to travel, write a book, or just spend more time with the grandkids, it requires careful planning. Current expenses are the first place to look for a reference as to how much sav- ings you will need to have in retirement. Some of these expenses may change; the mortgage will likely be paid off and college tuition for children will no longer be in play, but many of the current expenses can remain. The next factor to consider is how long to anticipate being in retirement. Through the aid of modern medicine and technology, many people are spending far longer in retirement than they originally imagined. According to the U.S. Department of Social Security, a woman turning age 65 today can expect to live, on average, until 87 and a man to 84. This means that most people need to plan for 20 years or more of retirement. A third factor to take into consideration is inflation, how much things are going to cost down the road. Costs associated with such things as groceries, housing, cloth- ing, medical care and education will continue to rise. A long-term rate of inflation used in financial planning is 2.7-percent annually, according to the U.S. Bureau of Labor Statistics. Most of the things we buy today will cost more in the future. Again, everyone’s retirement goals are different, but the combination of all these factors will determine how much a person may need in retirement. Question: How will I know if I have enough to retire? Answer: The good news is that it is never too late to begin saving for retirement. Whether retirement is years away or looming on the horizon, it is always a good time to put a plan into action. The sooner you begin, the easier it is to help reach goals as there is more time to accumulate a nest egg that you will likely need to draw on in retirement. Saving for retirement should be done in a tax efficient manner by incorporating IRS qualified accounts. Options such as an Independent 401(k) or an IRA should be part of the plan based on your needs. IRS qualified accounts can help you to save money on a tax deferred basis, meaning that the money going into the account today has not had taxes paid. Down the road in retirement when the savings in these accounts is drawn upon is when the income tax will be paid. This strategy allows for accumulating a larger nest egg to grow in the near term and potentially paying income taxes in retirement at a lower tax rate. For example, a married couple who is in the 28-percent federal income tax bracket decides to save $20,000 each into their own 401(k) plans. This could benefit them in a few different ways. They will save $11,200 on their current federal tax bill (2 x $20,000 x 28 percent). Also, if their federal income tax bracket were to fall to say the 15-percent tax rate in retirement, this strategy would represent a significant overall tax saving on the income earned. More good news for those 50 years and older is that the IRS provides a catch- up provision above traditional contribution limits. For independent contractors investing through an Independent 401(k) Plan, the maximum contribution is $53,000. Those 50 and older have an available catch-up provision of $6,000, taking the potential tax deferred savings to $59,000 for 2016. The earlier you start the easier it is, as you have that many more years to accu- mulate contributions and spread out savings for the retirement goal you have set. Question: Is it too late for me to start now? I’m in my 50s.
New York State REALTOR ® 19
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