Retirement: the American Dream. But how do we ever get there?
Over my career, this is the question I’ve heard the most. And the solution I hear the most in the media is to “max out your retirement accounts.” But on the whole, most people aren’t clear on how those accounts work or that they have options when it comes to saving their money. The most common of these accounts for actors is your union-sponsored 401k. Let’s check it out....
The Basics:
1. Money goes into a 401k before taxes are taken out of your paycheck, which means you don’t have to pay taxes on that money today. (Yay!)
2. Your money gets invested, which means it should go up, but it could go down. (Stock market and all that.)
3. The government has rules about you getting at this money:
- If you take it out before age 59 1/2, you have to pay a 10 percent penalty and the income tax you never paid in Step 1.
- Between ages 59 1/2 and 70 1/2, withdrawing is totally up to you. Just remember Uncle Sam takes his share any time money leaves this account for the rest of your life.
- After age 70 1/2, you must start taking the money out or you pay a 50 percent penalty plus the tax you never paid in Step 1. (Boo!)
4. One more rule: The tax rate you have to pay for withdrawing is not based on your income in Step 1. It’s based on your income in Step 3.
Example:
1. I put $1,000 into my Equity 401k when I’m 30. I subtract $1,000 from my total income that year, lets say $50,000, so I only have to pay tax on $49,000. If I pay 25 percent in taxes, I save $250.
2. That money grows to $10,000 by the time I’m 60.
3. Now I can take money out with no penalty. (Sweet!) But…
4. Now I have an income of $100,000 (because I succeeded at my goal to make more money each year)! Now my tax rate is 40 percent. (Because my income is higher, my tax rate is higher.) I take out the same $1,000 I put in at 30 and now I have to pay $400 in taxes.
Summary: When I put the money in, I saved $250. When I took it out, I paid $400. That means instead of saving money on taxes, I had to pay $150 more!
Individual Retirement Accounts (IRA) work exactly the same way.
So why do so many people put so much money in these accounts? It’s because the guys who created them are marketing geniuses. By calling these “retirement accounts” it gives the impression that they are the only way to save for retirement! Genius marketing, but not true.
Secret revealed: When you get to retirement, all the money you have is retirement money.
Why? Because you can spend all of that money in retirement. Your other accounts don’t disappear. They are still there for you! And in this case mo money is not mo problems.
To be fair, retirement accounts can be amazing! But only when used correctly—like when you have crazy high income and there is a solid chance you’ll be pulling in way less in retirement. Like, you know, those years you’re starring in your own sitcom. Generally, think of retirement accounts like dessert. Awesome at the end of the meal, but if all you eat are Schmackary’s Cookies and Talenti, it’s not going to work out so well in the long run.
RELATED: A Financial Advisor on What Actors Do Wrong When It Comes to Money
Now that you know all this, what can you do? Ask yourself the following questions.
1. Do I want the option to spend my money before I turn 60? (You might need this for a down payment on a home, to send a child to college, to start a business, etc.)
2. Do I think/hope I’ll be making substantially more money when I’m older than I am today?
3. How much money does my accountant say I will save in taxes today by putting money into a retirement account? (Ask them, they know!)
4. Have I explored other ways of saving and investing? (Savings accounts, Roth accounts, brokerage accounts, whole life insurance, etc.)
5. Is this all too much and do I want to talk to an expert?
And after all of this, don’t even get me started on Social Security!
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and do not necessarily reflect the opinions of Backstage or its staff.
