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Although Americans know they have to save for retirement, many have still failed.
More than half of American workers between the ages of 40 and 73 have less than $ 50,000 set aside for their golden years, research from the Pension Insurance Institute. Almost 6 out of 10 save less than 10% of their income.
Actually power stop working, you will need to make sure you leave enough aside. The general rule is about 15% of your income, although if you can’t save that much, it helps you a little.
There are different ways to save, depending on your situation. An employer-sponsored plan, such as a 401 (k) plan, or an individual retirement account — either traditional or Roth — are the most popular options.
They have different rules, although each offers some form of tax relief.
Here are the factors to consider when choosing the best option for your situation.
Employer-sponsored plans
It contributes to a traditional retirement plan sponsored by your employer, usually a 401 (k), are automatically deducted from your salary, without taxes. This reduces your taxable income every year. Instead, the tax is taken when you withdraw the funds in retirement. The rate will therefore depend on your tax bracket at the time.
The big advantage of the 401 (k) is that you can save up to $ 19,500 for 2021, regardless of income, said a personal finance expert. Chris Hogan, author of the book “Retire Inspired“and” Everyday Millionaires “.
In the meantime, with an IRA this year, you can only contribute $ 6,000. If you are 50 or older, you can save an additional $ 6,500 in a 401 (k) or an additional $ 1,000 in an IRA this year.
Your company may also offer a Roth 401 (k), which means that contributions are paid after tax and you will not be charged when you retire.
Hogan prefers Roth 401 (k).
“It exempts nearly $ 20,000 in taxes each year,” said Hogan, who is also affiliated with financial education and media firm Ramsey Solutions and hosts the online show “The Chris Hogan Show.”
In fact, the Roth 401 (k) essentially allows you to save more money than a traditional plan, said Pete Hunt, a certified financial planner and director of customer service at Exencial Wealth Advisors, based in Charlotte, North Carolina.
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Hunt said $ 19,500 (or $ 26,000 if he’s over 50) of cash after tax is “far more valuable than the same amount in cash before tax, especially over many years”.
If your employer matches a certain percentage of your contributions with 401 (k), try to at least contribute to that match, advisors say. Company money will be added before tax, regardless of whether your contributions are taxed.
When you turn 72, you must start taking the annual required minimum distribution or RMD from your 401 (k).
Roth IRA
Contributions to Roth IRA they are also made on a tax basis, so you don’t have to pay taxes when you withdraw money in retirement.
However, there are revenue constraints. You can deposit a maximum of $ 6,000 (or $ 7,000 if you are 50 or older) if you earn less than $ 198,000, if you are married and claiming together, or less than $ 125,000 if you are single. You can contribute a reduced amount if you earn between $ 198,000 and $ 208,000 and if you are married or between $ 125,000 and $ 140,000 if you are single.
Experts advise building a Roth IRA while you are young, as you may not qualify when you are older and earn more money.
You may also see higher tax rates in the future.
“I recommend it to all my clients, unless they are in a situation to think that they will earn significantly less in the future,” Hunt said.
There are also no RMDs with Roth’s IRAs, and you can withdraw your contributions at any time, without taxes and penalties. Generally, you can’t make money until you’re 59½. You also usually have more investment opportunities than you have in 401 (k).
It also doesn’t have to be an either-or situation. If you have a 401 (k) but also qualify for the Roth IRA, do both, Hunt said.
First, contribute to the employer for 401 (k). He then recommends investing money in health savings account, if you have a high-deductible health care plan. After that, invest the money in Roth, who has more flexibility, he said.
