Although construction and the building trades may be a lucrative industry for general contractors and tradespeople alike, construction employees are less likely than other industry workers to qualify for, and participate in, an employer-sponsored retirement plan.1 Fortunately, even for those who aren't eligible for an employer-sponsored plan, there are plenty of retirement savings options—as well as other financial planning techniques that may help them work towards their financial goals. Below, we discuss two specific financial planning steps that may benefit those in the construction field.
Look Into Retirement Options
Even if your employer doesn't offer a 401(k), if you have earned income, consider contributing up to $6,000 per year to an individual retirement account (IRA).2 Those who are age 50 and older may contribute an additional $1,000 per year as a catch-up contribution. Most IRA contributions are tax-deductible, reducing your taxable income and your overall tax.3
If you are in a low income tax bracket, you may find it beneficial to contribute to a Roth IRA. These contributions are made after tax, and any future qualified withdrawals, including gains, are tax-free. Roth IRAs have more flexible withdrawal rules than other types of retirement accounts They may be a good fit for construction workers who go through busy and slow cycles and may need to tap into retirement funds before reaching full retirement age.4
Other possible retirement plan options include a simplified employee pension (SEP), which is used by small business owners to fund both their own and employees' plans), the Savings Incentive Match PLan for Employees (SIMPLE) IRA and SIMPLE 401(k).5
Negotiate for Better Benefits
CBRE reports a construction boom is predicted for 2021, especially for commercial real esate.6 Contractors may find it difficult to hire and retain quality workers. In a favorable market for job-seekers, construction workers may be able to negotiate a higher hourly wage, a guaranteed weekly salary instead of a per-hour wage, 401(k) contributions, or generous fringe benefits. What's more, the longer you earn a higher wage and the more taxable income you report to the Social Security Administration, the higher your future Social Security benefit may be.
Certain fringe benefits may be tax-free. Examples of tax-free fringe benefits include health and dental insurance, medical expense reimbursements, education costs assistance for a worker, and day care expenses. 7 Obtaining these benefits in lieu of a higher wage may reduce your monthly costs in other ways without increasing your tax burden.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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