KEY TAKEAWAYS

• Social Security can add some padding to your retirement income, but don’t count on it to be your sole source if income
• Traditional IRA and  401(k) are two main types of Tax-deferred retirement savings accounts.
• The main differences between these two account options is that a 401(k) must be sponsored by an employer, while you can set up an IRA on your own.
• Both traditional IRA and 401 (k)s typically offer a range of investment options you can choose from, so your money grows over time. 
• Both Types of accounts lets you avoid paying taxes on your money’s growth while it’s in the account
• By contributing regularly and letting your money grow, you can use either account type to meet your retirement goals.

Many undocumented immigrants pay into Social Security through their paycheck deductions, but they might not be eligible to receive benefits from this federal program when they retire- Unless they become permanent residents (with some restrictions) or citizens. This highlights, even more, the importance of saving for retirement. Contrary to popular misperception, non-citizens CAN open the most popular types of retirement accounts: such as a 401(k), traditional IRAs, and Roth IRAs with qualifying IDs. I’m going to be doing this episode in 2 parts for the sake of simplicity because it’s a lot to take in. So In this episode 7 part one, I’ll be going over the different types of tax advantaged accounts and let you decide if any of them are the right fit for you.  

If you are going to open a retirement account in the United States as a non-resident alien, there are several things you will have to do. This includes ensuring that you have either a Social Security number from the Social Security Administration or an Individual Taxpayer Identification Number known as (ITIN) from the Internal Revenue Service (IRS) as you’ve probably heard me mention it in my previous episodes. 

What these numbers ensure is that all dividends, interest, and gains on your account can be correctly reported to the IRS. Either one can be obtained by sharing your immigration documents and confirming that you’re eligible to legally work and reside in the United States. If not then A savings account is always a good option.

The sad truth is that retirement itself is a foreign concept to many immigrants and therefore, they might have to spend their old age in poverty. So let’s begin 

Retirement is not cheap

Look retirement isn’t cheap. You’re most likely to have expenses like housing, healthcare, food, and taxes. Families rely on three main types of resources during retirement: (1) Social Security income, (2) pensions, and (3) private savings and wealth. Traditionally, this has been referred to as the “three-legged stool” of retirement security (Cutler 1996).

Social Security 

For starters paying into social security happens automatically when you work. It’s a payroll tax that you might have noticed being taken out of your paycheck automatically along with other taxes like your state tax. However, the money that you pay through your taxes is unfortunately not the same money you will receive later in life. See, Social Security is a pay-as-you-go system, where the money that you and your employer contribute now is used to fund payments to people who are currently receiving benefits, This include people who already have retired or are disabled,  survivors of workers who have died, dependents, and other social security beneficiaries. The problem, however, is that Social Security is not guaranteed because the Social Security Administration 

estimates that in the year 2035 it will go bankrupt unless changes are made to how the system is funded.     

 So what can you do?

Well, the main thing you can do to plan for your retirement is to save money in a tax-advantaged retirement account where your money can grow. If you don’t know the term “tax-advantaged” refers to any type of investment, financial account, or savings plan that is either exempt from taxation, tax-deferred, or that offers other types of tax benefits. 

These tax-advantaged accounts come in two forms: Tax-deferred accounts, and Tax-Exempt Accounts for this part 1 of episode 7 we’ll concentrate on Tax-deferred accounts 

1. 1. Tax-deferred accounts which as the name implies, the taxes on income are “deferred” to a later date. This is delaying any taxes that are due on investment gains until your funds are eventually withdrawn.
      1. Example: If your taxable income this year is $50,000 and you contributed $3,000 to a tax-deferred account, you would pay tax on only $47,000. Once you retire if your taxable income is initially $40,000, but you decide to withdraw $4,000 from the account, your taxable income would be bumped up to $44,000. 

• Types of accounts:

• Traditional 401 (k) plans or whatever the equivalent of a 401k through your employer might be. I know state and local government employees get 457 plans and nonprofits it’s called a 403 (b) plan. Regardless these are all employer-sponsored savings plans. They are defined contribution plans that are mostly funded by the employee through automatic payroll deductions, for some lucky people their employer might even match their contributions. If your work offers this option and you are an eligible employee, the way it works is you choose the amount of your tax-deferred contribution up to a certain limit and how you want to invest it. These might vary by the employer. The wages that you contribute to a 401 (k) plan are always yours, even if you leave the employer. If you do leave you can either choose to keep the money in their plan, move it to a new employer’s traditional 401 (k) plan, or even roll it over into a Traditional IRA without paying any taxes or penalties. You should note however, that if you withdraw funds before the age of 59.5, you will pay taxes and a 10% penalty in the year of withdrawal, although some exclusions do apply. After the age of 59.5 the withdrawals you make are taxable at ordinary income rates for that year. Tapping into your retirement fund is up to you until you turn 70.5 at that point, the government requires you to take distributions because they eventually do want their tax money and you can’t just keep delaying them forever.

• Traditional IRA which is short for Traditional Individual Retirement Account- is another type of tax-deferred savings account that you can open on your own, with a financial institution. The way this type of account works is you open up an account with a financial institution like a bank, a brokerage, or a robo-advisor. If you get one from a broker you’ll be able to invest in stocks and bonds; IR AS from banks generally offer Certificates of deposits and savings accounts. With this option you invest the money in your account. You can choose to invest in stocks, bonds and other assets. Note though that how much your account grows per year and whether you lose money depends on how you invest it. 

1. 1. 1. 1. There are also Contribution limits: you can add $6,000 to this type of account per year in 2020, even if you’re also contributing to a 401 (k) or other workplace savings plan. 
         2. The same rules apply as the 401 (k) where you’re not taxed on gains until you withdraw them. However early withdrawal may be taxed as income and assessed a 10% penalty.
         3. Not to be confused with a Roth IRA which is similar but which lets you contribute after-tax dollars and take withdrawals tax-free in retirement. I’ll be covering this type of account in more detail in part two of this episode.

Again with any of the retirement accounts I went over you are essentially delaying any taxes that are due on investment gains until your funds are eventually withdrawn when you retire. The hope is that when you make any future withdrawals, you will be in a lower tax bracket than when you made the contribution. 

 FINANCE FACTS

• The average American will retire at age 66 and live until nearly 79. However, for many, retirement will last much longer than 13 years especially for the hispanic community which according to the National Center for Health Statistics live roughly three years longer than their non-Hispanic Caucasian Peers, and about 6 years longer than non-Hispanic African Americans . The numbers are skewed by the number of individuals who die relatively young.
• Hispanics however also retire with significantly less banked on average than some other ethnic groups.
• With longer life expectancies and fewer savings than the overall population, longevity risk, or the threat of outliving one’s assets, presents a potentially bigger challenge for Hispanics.
• A lot of financial advisors recommend replacing 80% of your usual income once you hit retirement. Most of the time, Social Security payments alone won’t be nearly enough to hit that target. That’s why it’s so important to start saving while you’re young, using tax-advantaged vehicles such as an individual retirement account (IRA) or workplace 401(k).