How to decide on the precise retirement plan for you
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They know you need to save for retirement. When figuring out how to get started, or finding the best plan, you may be confused.
Still, it’s important. By the time you are 67, Fidelity Investments says you should set aside 10 times your final salary.
Here are your options and factors to consider when choosing the best course for your situation.
Employer Sponsored Plans
Contributions to a traditional pension plan sponsored by your employer, usually a 401 (k), are automatically deducted from your pre-tax paycheck. That lowers your taxable income every year. Instead, the tax will be deducted when you withdraw the money in retirement. The tax rate therefore depends on your tax class at the time.
The big advantage of the 401 (k) is that it can save you up to $ 19,500 through 2021 regardless of income, said personal finance expert Chris Hogan, author of “Retire Inspired” and “Everyday Millionaires”.
With IRAs, you can only contribute $ 6,000 this year. If you are 50 years of age or older, you could save an additional $ 6,500 in your 401 (k) or an additional $ 1,000 in your IRA this year.
Your company may also offer a Roth 401 (k). This means that contributions are made after tax and you will not be charged on retirement payouts.
Hogan prefers the Roth 401 (k).
“That means nearly $ 20,000 is gone tax-free every year,” said Hogan, who is also affiliated with financial education and media company Ramsey Solutions and hosts an online show called “The Chris Hogan Show.”
You can essentially put more money away with a Roth 401 (k) than with a traditional plan, said Pete Hunt, certified financial planner and customer service director at Exencial Wealth Advisors in Charlotte, North Carolina.
Hunt said that $ 19,500 (or $ 26,000 if you are over 50 years old) after-tax money is “far more valuable than the same dollar amount of pre-tax money, especially over many years.”
If your employer is putting a percentage of your contributions into the 401 (k), try to contribute up to at least that match. The company’s money is added before tax whether or not your contributions are taxed.
If you are 72 years old, you must take a minimum annual required distribution (RMD) from your 401 (k) whether you choose to or not.
Contributions to Roth’s individual retirement accounts are also made after tax, so you don’t have to pay tax when you withdraw cash in retirement.
However, there are income limits. You can contribute a maximum of $ 6,000 (or $ 7,000 if you are 50 or older) if you earn less than $ 198,000 if you are married and filing together, or less than $ 125,000, if you are single. You can contribute a reduced amount if you earn between $ 198,000 and $ 208,000 and are married, or between $ 125,000 and $ 140,000 if you are single.
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Experts advise building a Roth IRA when you are young as you may not qualify if you are older and make more money.
You may also see higher tax rates in the future.
“I recommend it to all of my clients unless they find themselves in a situation where they think they will earn significantly less in the future,” said Hunt.
There is also no required minimum distribution at Roths and you can withdraw your contributions at any time without tax or penalties. You generally cannot generate any income until you reach 59½. You also typically have more investment options than in a 401 (k).
It doesn’t have to be an either / or situation. If you have a 401 (k) but also qualify for a Roth IRA, you do both, Hunt said.
First, contribute to the employer’s match for the 401 (k). He then recommends putting money into a health savings account if you have a high deductible health insurance plan. After that, you put money in a Roth that has more flexibility, he said.