Optimistic Way To Save For Retirement

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RETChances are, save for retirement has a near-permanent spot on your to-do list. You know saving for retirement makes sense, but deep down, your retirement plan is to live off (or sell) the business you are busy building today. As a serial entrepreneur, I get it. Saving for retirement is more of an insurance plan than a core strategy.

If that sounds like you, then the Roth 401(k) is ideal. It differs from a traditional 401(k) in that you do not get a tax deduction on contributions. But it also differs from a traditional plan in that you do not pay tax on your investment returns. And it gets better, especially for entrepreneurs: With one easy maneuver, you can eliminate the obligation to ever take distributions from it.

The retirement-account giant Vanguard says that nearly half of the 401(k) plans it handles offer a Roth option, but fewer than 10 percent of folks have signed up. My educated guess is that the pickup is equally slow among entrepreneurs. I think that’s a big missed opportunity.

Roth Rules of the Road

Though there are income limits on who can make direct contributions to a Roth IRA, there is no such hurdle with the Roth 401(k). That provides a front-door opportunity for high-income entrepreneurs to create a tax-free income flow in retirement.

Besides, even if you are eligible to contribute directly to a Roth IRA (which means a modified adjusted gross income below $112,000 for individuals and $178,000 for married couples filing a joint tax return), the maximum you can set aside this year is just $5,500 if you are younger than 50, and $6,500 if you are older.

You can invest much more in 401(k)s. The base contribution limit to a 401(k) is $17,500 this year; anyone at least 50 years old can tuck away $23,000. Those are the same limits as with a traditional 401(k). Entrepreneurs under age 50 without employees (other than a spouse) can contribute as much as $51,000 this year in a special breed of these retirement plans called a Solo 401(k) or Individual 401(k). That’s a whole lot more security building than $5,500.

Read more at INC.