Retirement Contributions: How to Save for Your Future
Retirement is a time most people look forward to, but it requires planning and saving. The earlier you start contributing towards your retirement, the more money you will have saved up when you retire. There are several ways of saving for your retirement, and in this post, we will explore some of the most popular options.
1. 401(k) Plans
A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to save a portion of their pre-tax earnings in an investment account. The contributions made by employees can be matched by their employers up to a certain percentage.
The maximum contribution limit for 2021 is $19,500 if you are under age 50. If you’re over age 50, you can make an additional catch-up contribution of $6,500 per year.
One advantage of contributing to a 401(k) plan is that the funds grow tax-free until they are withdrawn in retirement. However, if funds are withdrawn from the account before age 59½ years old, they may be subject to income taxes and penalties.
2. Traditional IRAs
Traditional Individual Retirement Accounts (IRAs) allow individuals with earned income to invest pre-tax dollars into their accounts on an annual basis up until April 15th or Tax Day each year–the same deadline as personal tax returns.
For those who qualify based on income limits or not having access to another employer-sponsored retirement plan like a traditional pension or defined contribution option like a 401(k), IRA contributions may also be deductible for tax purposes at the end of each calendar year.*
For those under age 50 years old with earned income below $125K annually if single or below $198K combined incomes annually if married filing jointly**, the maximum yearly IRA contribution limit is currently $6k per individual ($7k total including catch-up contributions allowed). Those age 50 and above can contribute $7k per individual ($8k total with catch-up contributions allowed) until tax day each year.
While those funds grow tax-free until withdrawn in retirement, withdrawals from traditional IRAs are generally subject to income taxes as well as a possible early withdrawal penalty if taken before age 59½ years old unless certain exceptions apply.
3. Roth IRAs
Roth IRAs use after-tax money for investments, meaning the money has already been taxed on the front end. The advantage of this is that when it comes time to withdraw funds in retirement, there’s no additional tax burden for distributions once you meet certain requirements like holding the account for at least five years and being older than 59½.
The current maximum yearly contribution limit is $6k per individual ($7k total including catch-up contributions allowed) under age 50 earning up to $125K annually if single or below $198K combined incomes annually if married filing jointly***. Those over age 50 can contribute up to $7k per person (or $8k with catch-up contributions).
4. SEP IRA
A Simplified Employee Pension plan (SEP IRA) is another type of employer-sponsored retirement plan where employers make contributions on behalf of their employees into an investment account that grows over time. This option may be ideal for small business owners or self-employed individuals who do not have access to other types of employer-sponsored plans like a traditional pension or defined contribution option like a 401(k).
For eligible participants, such as those who earn more than $600 annually from an employer that sponsors the plan, these contributions may be made by your employer which can be deducted from taxable income.*
The total amount contributed cannot exceed either:
a) 25% of compensation (including any bonuses)
b) $58,000 in annual deposits for the year ending December 31st, 2021
5. HSAs
Health Savings Accounts (HSAs) are a type of savings account that people can use to save money for medical expenses. This option is available to those with High Deductible Health Plans (HDHPs). The contributions made to an HSA are tax-deductible, and the funds grow tax-free.
The yearly contribution limits currently allow individuals with HDHPs to contribute up to $3,600 per year per individual or $7,200 for family coverage if you’re under age 55. Those over age 55 may contribute an additional $1k annually as catch-up contributions until December 31st each year.
6. Roth vs Traditional Calculations
It’s important when considering Roth and traditional IRA options that you run some calculations based on your current income, expected income levels in retirement years and other factors like dependents or anticipated big-ticket expenses in order to determine what makes sense for your situation.
For instance, it may make more sense from a long-term perspective if:
– You’re young now but expect a higher salary later
– Expecting lower taxes upon retirement than during working years
– Anticipate having large medical bills or other major expenses coming down the pike
In these scenarios and others where future tax rates might be higher than today’s income brackets, pre-paying taxes on Roth contributions could work better overall because you’ve already paid upfront so they should not need to be taxed again at distribution time.
On the flip side though, if you’re currently within high-income brackets but anticipate retiring into lower ones then contributing pre-tax dollars might also make more sense as distributions would occur when taxable incomes are potentially much lower which means less taxes paid overall.
7. Don’t Forget About Overall Asset Allocation & Risk Management Strategies!
While it’s great to have various types of accounts set up for retirement savings purposes alone even across different institutions/financial service providers, don’t forget about diversification in your portfolio as well. Proper asset allocation according to risk tolerance levels can help ensure that you have a balanced strategy for retirement, too!
In conclusion, there are several ways to save for your retirement. Depending on your employer’s policies and income level, you may choose between 401(k) plans, traditional IRAs or Roth IRAs. SEP IRA options are also available for small business owners or self-employed individuals who do not have access to other types of employer-sponsored plans like a traditional pension or defined contribution option like a 401(k). Health Savings Accounts (HSAs) provide another avenue for saving with the added benefit of tax-deductible contributions and tax-free growth.
Remember: the earlier you start contributing towards your retirement, the more money you will have saved up when you retire! Additionally, don’t forget about overall asset allocation and risk management strategies when it comes time to invest those funds in order to best prepare yourself financially for what lies ahead during post-employment years down the road.