How to choose the right retirement savings plan

How to choose the right retirement savings plan

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While Americans know they need to save for retirement, many are still missing.

An Insured Retirement Institute survey found that more than half of American workers aged 40 to 73 have less than $ 50,000 for their golden years. About 6 in 10 save less than 10% of their income.

To really be able to stop working, you have to make sure you put enough aside. The general rule of thumb is around 15% of your income, although if you can’t save that much, even a little helps.

You can save in different ways depending on your situation. An employer-sponsored plan, such as a 401 (k) plan, or an individual retirement account – whether traditional or Roth – are the most popular options.

They have different rules, although each offers certain types of tax benefits.

Here are the factors to consider in finding the best option for your situation.

Employer sponsored programs

Contributions to a traditional pension plan sponsored by your employer, typically a 401 (k), are automatically deducted from your paycheques, before tax. This reduces your taxable income each year. Instead, tax is levied when you withdraw the funds at retirement. Therefore, the rate will depend on your tax bracket at that time.

The big advantage of a 401 (k) is that you can save up to $ 19,500 for 2021, regardless of your income, said personal finance expert Chris Hogan, author of “Retire Inspired” and “Everyday. Millionaires “.

Meanwhile, with IRAs, you can only contribute $ 6,000 this year. If you are 50 or older, you can save an additional $ 6,500 in your 401 (k) this year or an additional $ 1,000 in your IRA.

Your company may also offer a Roth 401 (k), which means that contributions are made after tax and will not be taxed on retirement withdrawals.

Hogan prefers the Roth 401 (k).

“It brings in about $ 20,000 tax-free each year,” said Hogan, who is also affiliated with financial education and media company Ramsey Solutions and hosts “The Chris Hogan Show,” an online show.

In fact, a Roth 401 (k) essentially lets you put in more money than a traditional plan, said Pete Hunt, certified financial planner and director of client services at Accentual Wealth Advisors based in Charlotte, Carolina. North. noted.

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Hunt said that $ 19,500 of after-tax money (or $ 26,000 if over age 50) “is worth much more than the same amount of pre-tax money, especially over multiple years.”

If your employer matches a certain percentage of your contributions to a 401 (k), try to contribute at least to that match, the advisor says. Business money will be added before tax whether or not your contributions are taxed.

When you turn 72, you should start collecting the required annual minimum distributions, or RMD, from your 401 (k).

Roth IRA

Contributions to a Roth IRA are also taxed, so you don’t have to pay tax when you withdraw the money in retirement.

However, there are income limits. You can contribute less than $ 198,000 if you are married and file jointly, or less than $ 125,000 if you are single. You can contribute less if you earn between $ 198,000 and $ 208,000 and are married or between $ 125,000 and $ 140,000 if you are single.

Experts recommend setting up a Roth IRA when you are young because you may not qualify as you get older and earn more money.

You may also see higher tax rates in the future.

“I recommend it to all of my clients, unless they’re in a position where they think they’ll earn a lot less in the future,” Hunt said.

There is also no RMD with a Roth IRA and you can withdraw your contributions at any time with no tax or penalty. You generally cannot enjoy any income until you are 59 years old. You usually have more investment options than a 401 (k).

It also doesn’t have to be a condition either or. If you have a 401 (k) but also qualify for a Roth IRA, do both, Hunt said.

First, contribute to the employer’s match for a 401 (k). If you have a high deductible health care plan, he recommends putting the money in a health savings account. After that, put the money in a Roth, which has more flexibility, he said.

IRA

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