Saving for Retirement while Unemployed: 3 Tips

Many people think saving for retirement is only possible if they are offered a 401(k) through an employer. While this is the most common way individuals are introduced into retirement savings accounts, there are various types of accounts that cater to self-employed or unemployed persons. Even without a stable salary, you can successfully put money away for retirement by planning for an emergency and living with a budget. 

#1 Set Up an IRA

First thing must come first: you will need to set up an independent retirement account if you wish to receive the tax benefits of placing money aside for retirement. You can invest into mutual funds or savings accounts without using an IRA, but you will receive none of the tax incentives designed to help reduce the fiscal burden of retirement. You can use a local accountant to help you set up an IRA, or you can explore options to do it yourself. It is often best to use an accountant for this step, because the accountant can answer your questions about which options are right for you. 

#2 Consider Roth vs. Traditional Options

While you are unemployed, your tax rate will be extremely low. This is an important thing to consider when you are setting up your IRA. The traditional IRA option allows you to deduct the contributions you make from your taxable income each year. This may be of little advantage to you in your given situation. The Roth option, however, allows you to contribute post-tax dollars today and then pay no taxes on the account when you withdraw. At that point, you can anticipate falling into a higher tax bracket. It would make sense to pay taxes today then give yourself the break later in life. The contribution limits on the Roth IRA are lower than the traditional IRA, but the limits are generally high enough for a low to no income person to contribute freely. Ask your accountant about your tax bracket and Roth versus Traditional IRA options when you select your retirement account.

#3 Budget for Savings

Ultimately, when you are on a fixed or limited income, the amount you save depends on how well you budget. Many individuals make the mistake of budgeting for all their expenses first then putting whatever is leftover into savings. The result is a fluctuating contribution and sometimes no contribution at all. Instead, take the opposite approach. Budget for your debts and the amount you will save each month before considering your other expenses. You may realize you can afford to put 6 percent of your salary into your IRA if you simply cut back on your phone bill or cable package. This is the better option when you think long-term. The saying, "pay yourself first," applies to this type of budgeting. Before you spend any money, make sure you are putting enough away for yourself to live on later in life. The circumstances of your unemployment are temporary; do not let this short-term problem become a long-term problem by neglecting your savings. 

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