A financially secure retirement is a major concern of many Americans, both young and old. Studies have shown that you will need about 80 percent of your pre-retirement income to maintain your standard of living. Social Security and employer plans will not provide all the income; an established retirement savings plan is the only way to help ensure a comfortable retirement. The earlier you start, the better.
One popular way to save for retirement has been with an Individual Retirement Account (IRA), but tax laws limit deductible contributions for certain taxpayers. Deductions for individuals at higher income levels, and those who are covered by retirement plans provided by their employers, are reduced or eliminated.
Contributions to IRAs are still allowable on a nondeductible basis, with contributors held responsible for maintaining accurate records on which contributions, if any, are deductible. Tax-deferred accumulation remains a major advantage of IRAs.
While IRAs still represent a good investment choice for long-term savings, you may require more to reach your retirement goals. For example, the most you can set aside on a tax-deductible basis each year in an IRA is, in 2019, $6,000 ($7,000 if you are age 50 or older), an amount which may or may not be sufficient to meet your retirement needs.
One way to supplement IRA retirement savings is by participation in alternative investments which grow tax-deferred, but which lack many of the penalties and restrictions of an IRA.
Investments that provide tax deferral and flexible benefits include annuities, tax-exempt bonds, mutual funds, and life insurance.
Life insurance, for example, performs two valuable functions: First, it provides financial protection for the family and heirs of the insured; and second, it has the potential to provide tax-deferred savings on each deposit or premium payment. There is no limit on the amount you may contribute, and you have complete access to the money through withdrawals at any time without restrictions, or through a tax-free loan. At retirement time, the cash value of life insurance can be converted to an annuity to provide a lifetime income. With life insurance there are no expensive administration fees outside of the contract and no yearly tax forms to complete.
Most life insurance plans can be set up to guarantee that if a serious illness or accident keeps you out of work, your premium payments will be made for you until you resume work. Fortunately, the Internal Revenue Service does not consider these payments taxable income.
All cash value policies provide your dependents and beneficiaries with death benefits that are tax-free income. In addition, life insurance can help provide retirement income that will be excluded by the government when determining tax, if any, on your Social Security retirement benefits.
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