Consider retirement savings alternatives to IRAs

Q: I work for a small practice and earn a modest income. My employer does not offer any retirement plan. It seems the only way I can save for retirement is through a traditional individual retirement account (IRA), which I only can fund up to $5,000 each year. I fear I won't be able to retire comfortably with this situation. Are there other ways to save without leaving the group or becoming self-employed?

A: Unfortunately, the tax code in its current form does not allow for any tax-deferred qualified plans for employees besides funding an IRA unless such plans are sponsored by an employer. That means you are limited to the $5,000 ($6,000 if you're over age 50) annual maximum contribution to an IRA. These limits may increase but still are not likely to provide the lifestyle you are looking for during retirement.

Your alternative is to save in a personal investment account with after-tax dollars. Although it won't have the advantages of a tax-deferred account, you can use strategies in a personal account that aren't available for tax-deferred accounts. For example, if one of your investments loses value, you can sell it and create a deduction of up to $3,000 on your personal income taxes by taking a capital loss.

Similarly, international holdings might go into your personal investment account to take advantage of foreign tax credits on your personal income taxes that would otherwise be lost in an IRA.

Fixed income investments, such as bonds and certificates of deposits, commodities, and real estate investment trusts, tend to be less tax efficient and should be held in the IRA so that you are not paying taxes on the current income earned. Given the limited amount you can put into a tax-deferred account, you will benefit from implementing asset location strategies to maximize your after tax dollars for retirement.

Send your money management questions to medec@advanstar.com.