We’re at the halfway point of 2018. Have you saved as much as you’d like for retirement? Are you behind on your savings goal? 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.
The good news is you still have time to put money away in your qualified accounts, such as your 401(k) plan or individual retirement accounts (IRAs), which 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, along with details about how much you can contribute to each this year. You still have time this year to ramp up your savings. Work with a financial professional to implement a savings strategy.
Employer 401(k) Plan
Your employer’s 401(k) plan may be your most effective available savings tool. Funds in a 401(k) plan 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.
Your 401(k) contributions could also provide current tax benefits. These contributions are deducted from your paycheck on a pretax basis. That means your contributions reduce your taxable income, thus reducing the amount of taxes you ultimately pay.
You could also take advantage of your employer’s matching contributions to ramp up your savings. 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
While you may contribute a sizable amount to your 401(k), you can also put money away in an IRA. These individual accounts offer tax-deferred growth. 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.
The traditional IRA is the most widely held. With a traditional IRA, you can make tax-deductible contributions to the account and then choose an investment allocation that aligns with your goals. The money grows tax-deferred, and all distributions are taxable.
It’s important to note that 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
The Roth IRA is a variation that’s grown in popularity in recent years, largely because of 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 Protecting Your Retirement. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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