Get started saving for retirement

Workers can't afford to wait to begin putting money back for later years

When I saw a statistic that almost half of Americans don't have a retirement plan at work, it hit me: Every time I've scolded people in this column for not taking advantage of their 401(k)-type plan, a sizable group of readers probably yelled back: "Too bad I don't have one, lady." It is too bad.

The Retirement Security Project, a nonprofit group affiliated with the Pew Charitable Trusts and based in Washington, found that more than 75 million American workers, or 48.4 percent, work for employers that don't offer a retirement plan.

But not having a workplace plan doesn't mean you can't save. If you paid too much in taxes last year, saving for retirement can lower your taxable income. And with stimulus rebates and tax refunds on their way, it's a good time to start putting money away.

Here are some options:

First, if you're an employee who has no retirement plan at work, talk to your boss about adding one. Yes, it can be costly to offer this benefit, but there are tax benefits for employers, and such perks can help attract and retain employees.

Maybe you don't want to rock the boat or have floated the idea to no avail. In that case, consider an individual retirement account, or IRA. There are two flavors: traditional IRA and Roth IRA.

IRAs are easy to set up with any big mutual fund company or bank, and investment choices are plentiful. In 2008, the maximum contribution is $5,000, or $6,000 for investors age 50 or older. You can open both an IRA and a Roth, but you can't put in more than the $5,000 maximum combined.

The key difference between the two is tax treatment. Roth IRAs are funded with after-tax dollars, but the money grows and can be taken out in retirement tax-free. You invest in a traditional IRA with pre-tax dollars, giving you a nice tax break on the front end, but you pay taxes when you use the money in retirement.

Generally, those in a higher tax bracket favor the traditional IRA's tax break today. But if you think taxes will rise — and your tax bracket with them — the Roth IRA would be the better bet.

The Roth IRA is nice also because the contributions you make can be taken out any time without tax consequences or a penalty. (A 10 percent penalty will strike in most cases, though, if you take the returns on your contributions out before age 59.5.) I think of the Roth as a way to save for emergencies and retirement on a shoestring.

Also, both types allow you to take money out without penalty for certain uses, such as buying your first home.

For employees without a retirement plan, IRAs are your only retirement-specific option. But if you want to save more, why not use a taxable brokerage account? So often the advice is to lock your money away for retirement in a tax-advantaged account. However, with capital gains rates of 0 percent through 2010 for couples with less than $65,100 taxable income (singles with taxable income of $32,500 or less) and a 15 percent tax for everyone else, this is an attractive option as long as it lasts. This might change soon depending on who becomes our next president.

There are several additional ways to save for self-employed people, each with its own complicated rules that require much more space to explain than I have. In a nutshell, the SEP, or simplified employee pension, and Simple IRAs are easy to set up and offer ways to sock more money away.

The SEP allows you to set aside up to 25 percent of your compensation, or $46,000, whichever is less. With the Simple IRA, you can save up to $10,500 plus an additional 3 percent of your salary. There's a catch-up contribution as well.

The nice thing about these options is that freelancers with full-time jobs can contribute, even if a retirement plan is offered at their full-time gig.

Self-employed workers with 401(k) envy can open a so-called Solo, or individual 401(k). In addition to allowing you to sock away $15,500 ($20,500 for the 50-plus set), this option allows a profit-sharing contribution of up to 25 percent, for total contributions of $46,000.

There are several other plans, from profit-sharing to pensions, but those are more suitable for small businesses with several employees.

The rules are complex and the decisions about which plan to use are many. So consult a financial adviser, and for more details read IRS Publication 560, a manual for small business retirement plans.

But the bottom line is this: All workplaces should strive to offer retirement benefits. But workers don't have to wait until their employer acts. Nor can they afford to.

Reach Kara McGuire at kara@startribune.com.