Saving for Retirement

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By Rachel Lawrence, INA Board Member
Originally posted in the INA Blog.
Someday everyone wants or needs to retire, and for many employees who work for large companies, there are systems in place from their first day on the job to make sure they have the ability to save for that day.  In our industry, things are a little less straightforward. To help you get the ball rolling, here is a brief overview of options available to nannies and their employers, but as with all tax and financial issues it is best to consult with your financial advisor before deciding which is right for you, as not all information applies to all cases. Also listed are known nanny industry providers/facilitators of each product, who graciously helped in providing information for this article. However, these products are also available through other companies.Traditional IRA (available through HomeWork Solutions, GTM Payroll Services, and Breedlove and Associates)This is the easiest form of retirement account for a nanny to set up as it can be started through nearly any financial institution, by the nanny, yet the employer can also make contributions. The nanny makes contributions to this account after taxes have already been deducted from her pay. All contributions by the employer are considered additional income, and are taxed accordingly each year. This means the money can be taken out at retirement tax free. Traditional IRA’s have a maximum contribution of $5,000 per year, with employees 50 years of age of older being allowed to contribute an addition $1,000. This type of account is 100% employee vested, meaning that the employee maintains ownership of the account.SEP-IRA (available through HomeWork Solutions and GTM Payroll Services)This type of account is set up by the employers, for their employee, and the contributions are 100% funded by the employer. Taxes are not required when the contributions are made, but the money will be taxed when it is withdrawn at retirement as income. The contributions each year are 0%-25% of the total compensation of the employee, with a maximum of $49,000. If an employer chooses to provide this type of plan to one employee however, they must also provide it to all employees by law.

Simple IRA (available through HomeWork Solutions and GTM Payroll Services)

This type of account is a dollar for dollar match system, between the nanny and employer, with a maximum contribution each year of up to 3% of the total compensation of the employee. The contributions are subject to Social Security and Medicare taxes, but not income taxes for the employee, and employer contributions are tax free. This plan, unlike the SEP-IRA, does not have to be provided to all employees as long as the employees excluded made less than $5,000 in each of the last two years, and are expected not to exceed $5,000 in the coming year. This plan is also 100% employee vested, like the traditional IRA.

Roth-IRA (newly available through Breedlove and Associates)

This plan is a tax-advantaged retirement savings plan that does not require any employer administration nor does it have any setup or administrative costs. The plan allows employees or employers to contribute up to $5,000 per year. If the employee is age 50 or older, an additional $1,000 may be contributed. The account utilizes after-tax dollars, so all growth is tax-free, and there are no taxes upon withdrawal at retirement age. The plan is owned and controlled by the employee so there are no portability issues or paperwork upon termination.

Simple 401K (newly available through GTM Payroll Services)

This plan provides nannies the potential for a pre-tax savings via payroll deferral of up to $11,500, with those 50 years old or older being allowed to invest an additional $2,500 per year. Employers match contributions on a dollar for dollar basis up to 3% of the employee’s total compensation. If an employee changes employers, they can roll the money to another qualified retirement plan or individual retirement account (IRA).

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