Please ensure Javascript is enabled for purposes of website accessibility

Over 40? Understand Your Retirement Savings Options

By Todd Campbell - Mar 13, 2016 at 12:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Saving money for retirement in your 40s is hard, but learning more about these retirement options may make it easier.


If you're in your 40s, you're undoubtedly beginning to wonder when you'll be able to hang up your hat, kick back, and enjoy retirement. You're probably also a little bit worried that the everyday costs associated with owning a home and raising children could mean that goal is further away than you hope. Are you doing all you can do to stay on track? Read on to learn about your retirement savings options.

Social Security
Although many Americans view Social Security as a retirement savings account, it isn't.

Social Security is a pay-as-you-go system, and that means that the payroll tax your paying on your income is funding your parent's Social Security payment, not being set aside for you in the future.

Social Security may not be a retirement savings account, but it's still an important source of retirement income.

According to the Social Security Administration, the average retired household is collecting $2,212 per month in Social Security income this year.

Because Social Security income will be based on your highest 35 years of income, your 40s are a great time to look for ways to boost your earnings. If you retire with more than 35 years of work history, your highest income-earning years will replace your lowest income-earning years, resulting in a bigger Social Security check.

Therefore, it may be a good time to ask for a raise or discuss advancement opportunities with your employer. Obviously, happiness trumps income, but all things equal, maximizing your income in your 40s is a great way to make sure you get the biggest Social Security check you can in retirement.

Traditional employer-sponsored plans
Employer-sponsored retirement plans are a major source of retirement income, and those plans, such as 401(k) and 403(b) plans, allow employees to salt away thousands in pre-tax money that can grow tax-deferred until age 70.5, when withdrawals must typically begin.

Employees usually contribute enough of their pay to make the most of their employer's matching contribution, but far more than that can be set aside in these plans every year. For example, workers in their 40s can contribute up to $18,000 to a 401(k) or 403(b) plan in 2016.

Self-employed workers in their 40s have options too. For example, entrepreneurs that set up a SEP-IRA plan can put away 25% of their pay, up to $53,000, this year, and those contributions can be deductible.

Or, business owners can consider a solo-401k plan. These one person plans may allow even bigger contributions.

For example, a person over 50 years old who owns an S-corporation and earns $50,000 in W-2 wages could contribute $18,000 in regular wages, plus a $6,000 catch-up contribution to a solo 401(k). His business could contribute an additional 25%, or $12,500 too. Overall, in one year that individual could conceivably put aside $36,500.

Traditional IRAs
Traditional IRAs are another important retirement savings option, and even if you participate in an employer-sponsored plan, you may still be able to contribute to one.

This year, people in their 40s can contribute $5,500 to a traditional IRA, and that contribution may be tax deductible.

If you or your spouse participates in an employer-sponsored retirement plan, you can deduct your traditional IRA contribution as long as your adjusted gross income is below $98,000. If your AGI is between $98,000 and $118,000, a partial deduction is allowed. If you make more than $118,000, you can still contribute to a traditional IRA, but you won't get the tax deduction.

Importantly, if you and your spouse aren't covered by a retirement plan at work, there are no income limitations on the tax deductability of your contributions.

If you do make a tax-deductible traditional IRA contribution, know that your contributions will grow tax deferred, but that minimum required distributions are required beginning at age 70.5, and those distributions will be taxed at whatever your income tax rate is at that point.


Roth IRA
If you're single or married and your AGI is below $117,000 and $184,000 respectively, and you'd rather pay taxes today on retirement contributions than in the future, then a Roth IRA may be your best option.

Roth IRAs have the same contribution limits as traditional IRAs, but those contributions are made with after-tax money. Money contributed to a Roth IRA will grow tax-free, and if you don't need that money in retirement, you can pass along more of it to your heirs because, unlike traditional IRAs, there is no requirement to withdraw money from them.

Since you already paid taxes on your contributions, if you do tap a Roth IRA in retirement after age 59.5, contributions and earnings can be withdrawn tax-free. Take money out before then, however, and you may have to pay a tax on earnings if your Roth IRA is younger than five years old.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.