Your working-age clients need to understand something important: Their post-retirement modified adjusted gross income (MAGI) could affect how much of their retirement income they can keep.
Many of your clients now depend heavily on 401(k) plans and traditional individual retirement accounts (IRAs) to save for retirement.
(Related: How Americans Use IRAs)
Thanks to mainstream media and a fortune spent on marketing by employers and financial institutions, the 401(k) plan and the IRA have become synonymous with retirement planning. Congress ramped up the message via the Pension Protection Act of 2006, which gives employers incentives to auto-enroll employees into 401(k) plans.
The 401(k) plan program currently lets an employee to defer income up to $19,000 in income per year, and it lets employees over age 50 add an extra catch-up contribution of $6,000.
The traditional IRA offers access to a pre-tax contribution of up to $6,000 per year, plus an extra $1,000 for those over age 50.
So why do so many people use 401(k) plans and IRAs?
The most popular reason is that the contributions are pre-tax, meaning that the contributions will lower your clients' taxable income for the year. Accountants by and large love this trait, as it can generate a larger tax refund.
Employer-sponsored plans like the 401(k) may provide a company match, which can be a very valuable perk. Employer-sponsored retirement plans are also accessible and user-friendly. The contributions never even touch the clients' pockets; employers kindly deduct the contributions from your clients' paychecks.