Planning for retirement can feel overwhelming, no matter what age you are. Taking the time to research and understand your options can set you up for a future of financial freedom and security. With the rising cost of living and increased life expectancy, having a solid retirement plan that prioritizes sensible investing and compound interest is more important than ever!
Here, we will break down the various retirement savings accounts, some of their unique benefits and how to choose the best one for your specific needs. Before we get started, we want you to know that this information is for educational purposes only and is not financial advice. Always consult with a reputable financial advisor to make decisions for your retirement.
From housing and health care to food costs, everyday expenses are continuing to climb while our average life expectancy is continuing to increase thanks to advances in healthy living. Without a well-structured plan, maintaining your desired lifestyle in retirement will be challenging.
There is power in starting early! Once of the most significant advantages is compound interest. Even with small contributions, if you get started early in life, that can turn into substantial savings over time.
For example – investing $200 per month at a 7% return starting at 25 can yield significantly more than starting with the same contributions at 40.
Tax advantage accounts have been designed to help you grow your savings effectively by reducing your tax burden. These accounts fall into two different categories
Tax-deferred accounts: Contributions are made pre-tax, reducing taxable income. Taxes are then paid at the time of withdrawal.
Tax-free growth accounts: Contributions are made after taxes have been paid, then the withdrawals in retirement are tax-free.
Traditional IRA: With this type of account, your contributions will be tax deductible depending on your income level. Your retirement withdrawals will then be taxed as ordinary income and your minimum required distributions (RMDs) will begin at the age of 73.
If you expect that you may be in a lower tax bracket during your retirement years, this may be a good option to consider.
Roth IRA: Contributions to this account will be made after taxes have already been taken out, so when you make withdrawals in retirement you will not be required to pay taxes at that time. Considering that tax rates often increase over time, this could be a solid option.
Unlike a traditional IRA, there are no minimum distribution requirements, which makes it a great option for long-term planning. If you plan to have increased earnings in the future and prefer to have a tax-free income later in life, this could be a good play for you.
401(k) Plans are often available through your employer and can have either pretax or Roth contributions. Oftentimes your employer will offer a401(k) match as a benefit of working for the company which is essentially free money. This type of retirement plan has higher contribution limits than IRAs so they allow you to save more.
403(b) Retirement Plans are like 401(k) plans, but they are specifically for public school employees and non-profit organizations.
Maximize your employer-sponsored plans to your benefit! Always contribute enough to get your employer’s full match and consider a Roth 401(k) if you prefer tax-free withdrawals later.
Here are some more options for you!
SEP IRA (Simplified Employee Pension): ideal for small business owners and freelancers with high contribution limits, up to 25% of your income!
SIMPLE IRA (Savings Incentive Match Plan for Employees): designed for small businesses, this option has lower contribution limits than a SEP IRA but is easier to manage when you are offering it as a benefit.
Solo 401(k): great for self-employed individuals with no employees and have higher contribution limits than an IRA which allows you to create a solid foundation for your financial future if you have extra to contribute.
Health Savings Accounts (HSAs): HSAs are often overlooked as a retirement savings vehicle, but they actually offer a triple tax advantage, so it can be beneficial to keep one maxed out. Contributions are tax–deductible so growth is tax-free and so are withdrawals for qualified health- related expenses. Since healthcare costs can be a major concern in retirement, an HSA can be a tax-free way to cover medical expenses with continued growth.
Brokerage Accounts: By hiring a brokerage to manage investments, you have more flexibility than traditional retirement accounts to possibly take on more risk and earn higher interest rates. These types of accounts do not have contribution limits, but they are subject to capital gains tax.
Pensions: This option is much less common today but is still used in some specific industries and municipal governments. A pension provides a guaranteed steady stream of income during retirement.
Thrift Savings Plan (TSP):This plan is specifically for federal government employees and offers both traditional and Roth options.
Start by assessing your current financial situation. Ask yourself these questions
¨ Do you have an employee sponsored plan and are you currently contributing the max?
¨ Are you self–employed or a freelancer?
¨ What’s your current tax bracket and how might that change in the future?
¨ Are there ways to diversify your retirement savings for maximum benefits?
Take the time to consider your answers to these questions and you will be able to assess how much you will need to retire comfortably while still enjoying your life.
Choosing the proper retirement account is a crucial step toward financial security. Whether you are just getting started or looking to optimize your current retirement strategy, understanding all of your options will help you make confident decisions.
Be sure to consult with your financial advisor and reach out to us to get connected with a counselor who can help you get started today!
