Building up a healthy retirement income can be done without a lot of stress and pressure.
If you have the option to sign up through your employer, do so as soon as you’re allowed. If you don’t, find an investor that can talk to you about other investment vehicles.
Choose the One That Gives You Free Money
Many savers work for a company that offers a 401(k) and provides a match as an incentive. Even if dollars are tight, you will want to sign up for the max it will take to get the full incentive as soon as you’re allowed. Think of it as a raise. Why wouldn’t you take a raise if offered one?
Similar accounts to a 401(k) include a 403(b) or 457 plan. Depending on who you work for, each of these offers different investment incentives to increase your savings rate. Not all of them offer matches, however.
The Tax Question
All of the accounts listed above are pre-tax. This means that your gross income will not include the money that you’re putting into these accounts.
If you prefer not to have too many dollars deducted from your check each pay period, bumping up your pre-tax retirement withdrawal for growth and later use will lower your tax burden. When you take money out of the account after the age of 59 and 1/2, it will be taxed at the regular income rate.
A traditional IRA is also funded with pre-tax dollars, though you have to wait for the tax benefit until you actually make the deposit into the fund.
Both traditional and Roth IRAs can be set up for you or your spouse, and it’s possible to set one up for a dependent child as well.
Your Age Will Matter
The amount you can invest will change as you age. According to the experts at SoFi Investing, the investment caps are constantly changing on IRAs, both Traditional and Roth. This is why a financial advisor is so important when considering your retirement options.
Watch Your RMDs
The RMD, or required minimum distribution, is another moving target. Again, as you approach 65, talk to your financial advisor to make sure you’re signed up for the required insurance program and check your RMD requirements. Missing an RMD can be extremely costly, including penalties that can be quite onerous.
The age for your first RMD is around 70. Legislation and world events can change that, however. If you’re still working and not interested in withdrawing any retirement as you approach 69, make an appointment with your advisor and determine
- Where to put the distribution
- How to manage the tax requirement
- What steps to take in the future
Don’t put yourself at risk of this penalty; it’s a terrible waste of the money you’ve worked for.
The earlier you start, the longer your money will have to earn more money. Nobody has ever complained that they had too much money in savings, and your employer will even beef up the account if you have a 401(k).
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Author: Thomas Wiggins