Is your retirement saving on target? It’s never too soon to get started. There are several options to choose from.
401(k). If your employer offers a 401(k) retirement plan (or a 403(b) for teachers, ministers and those who work for not-for-profits), it’s a great idea to sign up. In a typical plan, you choose a percentage of your salary to be deposited in your plan account with each paycheck. Find out if your employer provides a match of your contributions and try to make the most of it, since the employer’s match is like a bonus that will boost your balance.
Traditional IRA. Individual Retirement Accounts, commonly referred to as IRAs—both traditional and Roth—allow you to accumulate earnings on your contributions tax free during your working years. You can contribute up to a certain amount ($5,500 in 2018) in a traditional IRA and deduct all your contributions from your taxable income if you are not covered by a workplace retirement plan. If you do participate in an employer’s plan (or if your spouse does and you file jointly), you may be able to deduct some or all your contributions if your salary is below certain income limits. Those over 50 can make additional catch-up contributions. You will have to begin taking required minimum distributions from your plan when you turn 70½, and those distributions will be taxable. If you withdraw any funds before age 59½, you will likely have to pay tax and penalties on that amount.
Roth IRA. With a Roth IRA, your contributions to the plan aren’t deductible, but there are no required distributions in retirement and any earnings you withdraw after reaching age 59½ are not taxable. You can withdraw your contributions without consequences, but you will likely have to pay interest and penalties if you take out any interest or earnings before age 59½. There are also income limits that affect who can contribute to a Roth IRA and limits on how much you can contribute each year. Anyone—no matter their income--can convert a traditional IRA to a Roth, but you will have to pay taxes on the money you withdraw from the traditional IRA.
Options for those who are self-employed. These plans, which are usually easy and relatively inexpensive to set up, also allow your money to grow tax free over time. They include:
- Solo 401(k). Sole proprietors can make both employer and employee contributions to traditional or Roth Solo 401(k)s in amounts that are significantly higher than those for other retirement vehicles.
- SEP-IRA. Simplified Employee Pension (SEP) IRAs also have high contribution limits. Contributions are deductible and withdrawals after age 59½ are taxable.
- SIMPLE IRA. These plans may appeal to small businesses with fewer than 100 people that want to offer employees a retirement savings option and are ready to commit to making employer contributions to the plans. Contributions are deductible and withdrawals in retirement are taxable.