Whether you're just getting started, already retired, or somewhere in between, Azzad can help you build a plan to fit your needs. We make retirement planning easy.

Investing for Retirement

Your choices today determine what kind of lifestyle you’ll have tomorrow. Ideally, you and your loved ones will want to start saving as early as possible to put the power of time and compounding on your side.

Procrastination can cost you significant money. That’s why savvy investors take advantage of time by investing early and consistently, as illustrated by our hypothetical example.

Let’s Get Started

Begin by determining your retirement income needs. Many experts recommend 60% to 70% of your pre-retirement income, but that is only an estimate. Use your current expenses to help estimate your annual retirement expenses, and don’t forget to allow for future inflation. Potential family and community needs may also be weighed in.

Next, inventory your estimated future assets and income. These may include Social Security, employer-sponsored retirement plans, family support and other sources. The gap between your future needs and the income provided by other sources will have to come from personal savings.

Maximize your tax-deferred retirement savings options

Carefully consider your tax-advantaged retirement savings choices. Employer-sponsored retirement plans are a great place to start. You may also be able to take advantage of a combination of IRA plans. It all depends on your situation. One thing is clear: saving in a tax-advantaged retirement plan can be a powerful way to build your retirement nest egg.

 

Let’s assume you have $20,000 to invest. You put $10,000 into a taxable account that earns 6% per year, and use a portion of these assets to pay taxes attributable to the account’s earnings. You put the other $10,000 into a tax-deferred account such as a 401(k) that also earns 6% per year. Assuming that you’re in the 28% tax bracket, in 30 years your taxable account will be worth about $35,500, while your tax-deferred account will be worth over $57,000. That’s a difference of over $21,000.

Even if the funds invested in the tax-deferred account are subject to federal income tax upon withdrawal–as they would be if you made pretax contributions to a 401(k)–you would come out ahead. This is true even if you took the entire amount in the tax-deferred account as a lump-sum distribution after 30 years and paid tax on the full amount (at 28% tax, you’d end up with a little over $41,000). Of course, most individuals draw on their retirement savings gradually during their retirement years–when they may be in a lower tax bracket–rather than taking a large lump-sum distribution.

Elective deferral limits 2015 2016
401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs 1 (Includes Roth 401(k) and Roth 403(b) contributions) Lesser of $18,000 or 100% of participant’s compensation Lesser of $18,000 or 100% of participant’s compensation
SIMPLE 401(k) plans and SIMPLE IRA plans1 Lesser of $12,500 or 100% of participant’s compensation Lesser of $12,500 or 100% of participant’s compensation

1 Must aggregate employee contributions to all 401(k), 403(b), SAR-SEP, and SIMPLE plans of all employers. 457(b) plan contributions are not aggregated. For SAR-SEPs, the percentage limit is 25% of compensation reduced by elective deferrals (effectively, a 20% maximum contribution).

IRA contribution limits 2015 2016
Traditional IRAs Lesser of $5,500 or 100% of earned income Lesser of $5,500 or 100% of earned income
Roth IRAs Lesser of $5,500 or 100% of earned income Lesser of $5,500 or 100% of earned income
Additional “catch-up” limits (individuals age 50 or older) 2015 2016
401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs 2 $6,000 $6,000
SIMPLE 401(k) plans and SIMPLE IRA plans $3,000 $3,000
IRAs (traditional and Roth) $1,000 $1,000

2 Special catch-up limits may also apply to 403(b) and 457(b) plan participants.

Defined benefit plan limits 2015 2016
Annual contribution limit per participant No predetermined limit. Contributions based on amount needed to fund promised benefits No predetermined limit. Contributions based on amount needed to fund promised benefits
Annual benefit limit per participant Lesser of $210,000 or 100% of average compensation for highest three consecutive years Lesser of $210,000 or 100% of average compensation for highest three consecutive years
Defined contribution plan limits (qualified plans, 403(b) plans, SEP, and SIMPLE plans) 2015 2016
Annual addition limit per participant (employer contributions; employee pretax, after-tax, and Roth contributions; and forfeitures) (does not apply to SIMPLE IRA plans) Lesser of $53,000 or 100% (25% for SEP) of participant’s compensation Lesser of $53,000 or 100% (25% for SEP) of participant’s compensation
Maximum tax-deductible employer contribution (not applicable to 403(b) plans) 25% of total compensation of employees covered under the plan (20% if self employed) plus any employee pretax and Roth contributions; 100% for SIMPLE plans 25% of total compensation of employees covered under the plan (20% if self employed) plus any employee pretax and Roth contributions; 100% for SIMPLE plans

* For self-employed individuals, compensation generally means earned income. This means that, for qualified plans, deductible contributions for a self-employed individual are limited to 20% of net earnings from self-employment (net profits minus self-employment tax deduction), and special rules apply in calculating the annual additions limit.

Additional “catch-up” limits (individuals age 50 or older) 2015 2016
401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs 2 $6,000 $6,000
SIMPLE 401(k) plans and SIMPLE IRA plans $3,000 $3,000
IRAs (traditional and Roth) $1,000 $1,000

2 Special catch-up limits may also apply to 403(b) and 457(b) plan participants.

Retirement plan compensation limits 2015 2016
Maximum compensation per participant that can be used to calculate tax-deductible employer contribution (qualified plans and SEPs) $265,000 $265,000
Compensation threshold used to determine a highly-compensated employee $120,000 (when 2015 is the look-back year) $120,000 (when 2016 is the look-back year)
Compensation threshold used to determine a key employee in a top-heavy plan $1 for more-than-5% owners; $170,000 for officers; $150,000 for more-than-1% owners $1 for more-than-5% owners; $170,000 for officers; $150,000 for more-than-1% owners
Compensation threshold used to determine a qualifying employee under a SIMPLE plan $5,000 $5,000
Compensation threshold used to determine a qualifying employee under a SEP plan $600 $600
Traditional deductible IRA income limits–Income phase-out range for determining deductibility of traditional IRA contributions for taxpayers covered by an employer-sponsored plan and filing as: 2015 2016
Single $61,000 – $71,000 $61,000 – $71,000
Married filing jointly $98,000 – $118,000 $98,000 – $118,000
Married filing separately $0 – $10,000 $0 – $10,000
Traditional deductible IRA income limits–Income phase-out range for determining deductibility of traditional IRA contributions for taxpayers not covered by an employer-sponsored retirement plan but filing a: 2015 2016
Joint return with a spouse who is covered by an employer-sponsored retirement plan $183,000 – $193,000 $184,000 – $194,000
Roth IRA compensation limits–Income phase-out range for determining ability to fund Roth IRA for taxpayers filing as: 2015 2016
Single $116,000 – $131,000 $117,000 – $132,000
Married filing jointly $183,000 – $193,000 $184,000 – $194,000
Married filing separately $0 – $10,000 $0 – $10,000

2 Special catch-up limits may also apply to 403(b) and 457(b) plan participants.

Azzad Asset Management does not provide tax or legal advice.