Understanding your retirement plan options
With the excess of choices these days, you might have a good selection of options to consider when it comes to saving for retirement.
However, your retirement plan options are limited based on a number of factors, and the benefits or drawbacks of each plan aren’t always so clear. Luckily, there are plenty of resources about retirement plans that can help you understand the differences.
Individual retirement plan options
One of the most common retirement funds is one that’s open to almost everyone: the individual retirement account (IRA). An IRA is an investment account you can open with any financial institution that offers one. Once open, you can immediately start contributing money, with a few rules‡ to keep in mind:
- Individuals can contribute up to $5,500 per year to their IRA.
- You can deduct up to that same amount from that year’s taxable income.
- There are two types of IRAs: traditional and Roth. In a traditional IRA, you won’t owe income taxes on contributions or the interest you earned until you start taking withdrawals in retirement. By contrast, in a Roth IRA, you’ll pay those taxes up front but owe nothing when funds are withdrawn.
The biggest advantage of an IRA is its flexibility. Compared to other retirement accounts, you should have a wider selection of choices for how your savings are invested, and you can contribute to an IRA at the same time as another retirement savings account.
Employer-sponsored retirement plan options
It’s common for some companies to offer retirement benefits to their employees, although each employer may have their own rules and restrictions for who is eligible.
The 401(k) is the most popular employer-sponsored retirement fund type, and it works very similarly to an IRA, with a few important distinctions‡:
- Only eligible employees at participating companies can contribute to their firm’s 401(k) plan, and those savings are automatically deducted from the worker’s paycheck.
- As of 2018, up to $18,500 can be invested in a 401(k) fund per year. This includes any employer contributions. This amount may be deducted from income tax returns as well.
- 401(k) savings may only be invested in funds offered by the plan provider.
Many employers will match employee 401(k) contributions up to a certain amount, so it’s advantageous to participate in a plan if you have the option.
Social Security benefits are a well-known channel for retirement savings, which are provided by the federal government and administered to eligible U.S. citizens once they reach retirement age. The amount a retiree receives from Social Security depends on numerous factors. However, according to estimates from the Social Security Administration, the average benefit check‡ totaled around $1,369 per month in September 2017. This might not be enough to cover all expenses, especially as health care costs rise with age. Therefore, Social Security is best thought of as a supplement to other savings.
No matter which retirement savings strategy suits you the best, it’s important to start thinking about your retirement plan options, costs and needs as you age. Combining all three sources of retirement savings—IRA, 401(k) and Social Security—could help provide a sizeable nest egg to cover daily expenses in life after work, but research your options before making a selection.
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