There are a wide range of options available when it comes to a retirement account, and the earlier you can start saving the better. Surprisingly, nearly half of households with someone 55 years or older have no retirement savings at all, according to the U.S. Government Accountability Office. Here are some tips on how to pick the right retirement account and what you should know about these accounts before you decide which one is right for you.
There are plenty of account types to choose from, some employee-sponsored and others individual plans. Relying solely on Social Security in retirement is not recommended, because it likely won’t be enough to live comfortably. Even if you can’t contribute much, contributing as much as you can to a retirement account is better than nothing.
Employer-sponsored Retirement Plans
If your employer provides a plan to help you save for retirement, you should almost always choose to take part in that benefit. It is one of the most valuable benefits companies can offer, and many employers will match your contributions at a certain percentage. This is a great way to kickstart your savings.
1. Traditional 401(k) — In this type of employer-sponsored account, you make contributions on a pre-tax basis, which means you don’t have to pay taxes on what you invest until you make withdrawals during retirement. In 2023, the contribution limit will be $22,500 per year, or up to $30,000 if you are 50 or older. This does not include employer contributions, which will equate to a percentage of your salary.
2. Roth 401(k) — With this plan, your contributions are after-tax dollars, which means the withdrawals you make in retirement are not taxed as income. If you choose a Roth 401(k), your employer can still offer a match percentage, but it must be deposited into a traditional 401(k) account.
Deciding whether to open a traditional 401(k) or a Roth 401(k) depends on your tax bracket. If you think your income taxes are higher today than they will be in retirement, a traditional 401(k) will offer lower taxes on withdrawals in retirement. If your income tax today is likely lower than it will be in retirement, a Roth 401(k) might be a better choice.
Individual Retirement Plans
For those who do not have access to an employer-sponsored retirement plan, or who simply want to supplement their retirement savings, Individual Retirement Accounts (IRAs) are usually the best way to go.
1. Traditional IRA — Any person with taxable income can open a traditional IRA. Contributions to a traditional IRA are typically tax-deductible and the earnings are tax-deferred. Once you start making withdrawals during retirement, those funds are taxed as regular income. You can contribute up to $6,500 to a traditional IRA, or $7,500 if you are 50 or older.
2. Roth IRA — For people with a bit lower income level, a Roth IRA is a great choice. The contributions are not tax-deductible, but you will not have to pay any taxes on withdrawals in retirement. Additionally, a Roth IRA can serve as a backup emergency fund if something unexpected arises as you are not penalized for taking out money before retirement. The contribution limits are the same as a traditional plan, but you must be earning less than $153,000 to contribute.
Research Your Options and Ask A Banker
There are several other types of retirement accounts you can choose from — such as SIMPLE and SEP IRAs, solo 401(k)s, 403(b)s, and others — but the above options are among the most common. Speaking to a banker about your options can be a helpful way to make sure you’re making the best decision for you. Together, you and your banker will evaluate your current financial situation. From there, they will work with you to address critical needs, consider tax strategies, and find ways on how to pick the right retirement account to help fill any gaps that could keep you from achieving the lifestyle you want.
Through on-site financial planning, comprehensive solutions, and convenient digital capabilities, our partnership can help you reach your financial goals. Learn more on our website or call us at 800-526-9127.
NOTE: 401(k) accounts are not FDIC-insured.