The year is halfway over. Have you met your savings goals so far this year? Are you behind on your savings for retirement? It’s easy to get behind on savings, especially when it comes to retirement, which may be years or decades in the future. After all, you probably have many other expenses and financial challenges that seem more urgent.
Fortunately, there’s still plenty of time left in the year to put away money for retirement. You may want to use qualified accounts to do so. These accounts, which include 401(k) plans and individual retirement accounts (IRAs), allow you to grow your funds on a tax-deferred basis. That means you don’t pay taxes on growth while the assets are inside the account.
Below are three commonly used qualified accounts and how they can help you save for retirement. You still have time left this year to ramp up your savings. Work with a financial professional to implement a savings strategy.
Employer 401(k) Plan
Do you participate in your employer’s 401(k) plan? If so, it may be your most powerful available savings tool. Your 401(k) funds grow tax-deferred, which means you don’t pay taxes on the growth until you take distributions. That could help you accumulate funds faster than you would in a taxable account.
You could also see current tax benefits from your 401(k) contributions. They’re usually deducted pretax from your checks. That means your contributions reduce your taxable income, thus reducing the amount of taxes you ultimately pay.
Matching employer contributions also make the 401(k) a powerful savings tool. Many employers match their employees’ contributions on a dollar-for-dollar basis up to a certain limit. For instance, your employer may match as much as 3 percent of your annual salary in contributions. You can significantly increase your savings rate by contributing enough to get the full employer match.
In 2018 you can contribute as much as $18,500 to your 401(k) plan. If you’re age 50 or older, you can also contribute an extra $6,000 in catch-up contributions, bringing your total allowable contribution to $24,500.1
You also have the option of contributing money to an IRA, even if you’re also contributing to a 401(k) plan. An IRA is an individual account that offers tax-deferred growth specifically for retirement savings. If you don’t have an IRA, you can open one through a financial professional, who can also help you develop and implement a strategy that aligns with your needs and goals.
There are various types of IRAs, but the traditional is the most widely held. It receives tax treatment that’s similar to that of the 401(k). You make tax-deductible contributions to the account and then allocate the funds based on your goals and risk tolerance. The money grows tax-deferred, and all distributions are taxable.
Remember, IRA funds are meant for retirement. If you take a distribution from the account before the designated age—59½—you could face a 10 percent early withdrawal penalty. There are exceptions to this policy for things like disability and financial hardship. However, most early withdrawals are subject to the penalty in addition to income taxes.
In 2018 you can contribute $5,500 to an IRA. If you’re age 50 or older, you can contribute an additional $1,000 in catch-up contributions, giving you a total allowable contribution of $6,500.2
While the traditional IRA may be the most widely held type of IRA, the Roth IRA has actually grown in popularity in recent years. The Roth’s popularity is largely due to its unique tax treatment.
Unlike the traditional IRA and 401(k), Roth contributions are made with after-tax dollars. This means you can’t deduct your contributions. Your funds still grow on a tax-deferred basis inside the account. Distributions from the account are tax-free assuming you’re age 59½ or older. You can use the Roth to create a stream of tax-free retirement income.
Ready to implement your retirement savings strategy? Let’s talk about it. Contact us today at Stoll and Basler Financial Services. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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