Far too often, Americans don’t properly plan for retirement. Inconsistent income, surprise medical bills, and unexpected expenses can keep you from putting away the money you need to make sure you’re secure in your golden years. Planning for the future can be confusing and managing your finances is never easy, so here is some advice on the different ways you can save for retirement.
A 401k is a great place to start when planning for your retirement. This can be an especially lucrative option if your company offers to match whatever you contribute. One of the benefits of a 401k is that you can deposit funds from your paycheck directly into the account before taxes are taken out. If you leave your company, you can roll over your savings into your new employer’s 401k or an IRA account. The only downside of investing in a 401k is that the money will be taxed as it’s taken out during your retirement.
Professionally Managed Account
If you have ever asked yourself, “what is a managed account?”, here is a brief explanation: a managed account is a type of investment account that’s owned by an individual investor (you) and overseen by a hired professional money manager. Unlike mutual funds, managed accounts are personalized investment portfolios tailored to the specific wants and needs of the account holder. Many prefer to have a hands-off retirement account where the work of investing and managing funds is done for them. Trusting someone else with your investment can be risky, but the financial returns are almost always higher than other traditional retirement accounts.
Before the age of 50 anyone can contribute up to $5,500 into an IRA annually ($6,500 after the age of 50). The money deposited into an IRA grows tax-free because it’s taxed during the contribution, unlike a 401k. However, you can’t deduct your IRA contributions from your taxable income if you earn more than $71,000 annually as a single tax filed or $118,000 for those filing jointly. If you aren’t covered by a retirement plan at work, you can get a full deduction no matter what your income is.
With a Roth IRA, you contribute post-tax funds and income. This means that your deposits will be taxed as they go in and can’t be deducted. The money will grow tax-free the entire time and will be withdrawn tax-free after the age of 59 ½. Unlike a traditional IRA, there is no mandatory withdrawal at the age of 70; you are allowed to withdraw the money that you initially deposited (not the earnings) anytime you want, tax-free. You can contribute to both an IRA and a Roth IRA, but the total contributions into both accounts can’t exceed $5,500.
Health Savings Account (HSA)
This type of retirement account isn’t one that you often hear about. If you have an insurance plan with a high deductible, you can save money tax-free in an HSA. The annual contributions cap out at $3,350 or $6,650 for a family. Once you reach the age of 55, you can contribute an additional $1,000 annually. Until the age of 65, this money can only be used to pay medical expenses. After 65 the funds can be deducted for any reason, but you will have to pay income taxes. One of the major benefits of an HSA is that any money you don’t spend annually will roll over indefinitely.
SEP stands for simplified employee pension—this type of account is typically used by self-employed or small business owners. As an employer, you can contribute up to 25% of your annual income or a maximum amount of $53,000. An additional $3,000 will be allowed after the age of 50.
This particular plan allows for small employers (99 employees or less) to set up IRAs with little paperwork. Employers must match employee contributions and the contribution increases by $3,000 after the employee turns 50.
One of the most important things to do when securing your retirement is to keep a calm and level head. A common mistake people make during economic downturns is to withdraw or shift funds in a desperate attempt to recover losses. There may be some instances where moving funds could be beneficial, but more often than not you should always leave them in your account. If keeping track of your funds is more than you can handle, a professionally managed account is always a great way to secure your retirement.