6 Retirement Plan Options to Help You Save More
If there is one thing you should absolutely save for right now, it is for retirement. What you do now will make a big difference in your future. Check out the various retirement plans available for you and start contributing to making the most of your money.
If your employer does not offer a retirement plan, setting up an Individual Retirement Account or IRA is a good choice. It is a tax-favored investment account that you can use to invest in ETFs, mutual bonds, stocks, and bonds. In 2019, you can contribute up to $6,000 – or $7000 if you are 50 years old and above. Your investment gains are tax-free.
2. Roth IRA
Compared to a traditional IRA, a Roth IRA uses after-tax dollars. But any money generated within the Roth is tax-free. Withdrawals made to a Roth IRA before retirement age are penalty-free, too, as long as five years have passed since your first contribution. Choose this retirement option if you have extra cash and are expecting your income to grow. You can even contribute to both an IRA and Roth IRA.
3. 401(k) Plan
The 401(k) plan is a workplace retirement account, given as an employee benefit. This allows you to contribute a portion of your pre-tax paycheck to tax-deferred investments. All investment gains are tax-deferred until you withdraw your money. There is a 10% penalty fee if you withdraw before age 59 1/2 and the withdrawal is subject to federal and state income taxes, but with exceptions. Some employers match employee contributions to a 401(k). Take full advantage of it. It is effectively free money!
4. Roth 401(k)
Another employee offered a retirement account, the Roth 401(k) is a mix of Roth IRA and 401(k). Contributions come from your after-tax paycheck. Both contributions and earnings are never taxed again, given the plan existed for at least five years. Note that contribution limits are stricter with a Roth 401(k) if your modified adjusted gross income (MAGI) reaches a certain point. If you earn too much, contributions are prohibited, too. MAGI limits are posted at $122,000 for single filers in 2019, and you cannot contribute if it reaches $137,000. For married filers, the limits are $193,000 and $203,000.
5. SIMPLE IRA
The Savings Incentive Match for Employees (SIMPLE) IRA is a retirement plan similar to a 401(k) and is offered by small businesses with up to 100 employees. Contributions are made with pretax paycheck withdrawals and the money grows tax-deferred until retirement. Early withdrawals can result in massive penalties, up to 25%!
6. SEP IRA
Start this account to save for retirement if you are self-employed with no employees. Your contributions are tax-deductible. The maximum annual contribution is $56,000 or 25% of income. This is higher than most other tax-favored retirement accounts.