It’s the New Year and creating resolutions for the new year is back in vogue. Let’s talk about a resolution that should definitely be on your list—saving for retirement.
Don’t let your retirement goals slip away any longer. Instead use this momentum to make a solid retirement plan, and you’ll be well on your way to building lasting wealth. So where should you be saving for retirement?
Savings Account—The savings account may feel like the safest place to store your money, but for retirement savings it won’t provide growth potential like other options. Savings accounts are easy to access and good for emergency funds or short-term savings, but if you will be holding onto the money for more than 5 years, think about investment accounts for much better growth potential.
Traditional 401(k)—Retirement accounts offered through your workplace are a great way to start building your retirement savings. If your employer offers contribution matching, it makes sense to contribute at least enough to get the maximum match. These funds will grow tax free and can grow significantly more than money in a savings account. There are a few limits with these accounts. This year the contribution limit is $18,500, and there are penalties for early withdrawal.
IRA—An IRA is an Individual Retirement Account and for many people it’s a great place to build retirement wealth. In fact, many financial advisors recommend targeting an IRA once you max out your 401(k) matched contributions. With these accounts you generally have more investment diversity and control than with 401(k), but the contribution limits are lower. This year the maximum IRA contributions are $6,000 (or $7,000 if you're over 50). There are two types of IRA account, traditional and Roth IRA.
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Traditional and Roth IRAs mostly differ in their tax benefits. The traditional IRA gives you tax benefits now as deductible contributions. The Roth IRA gives you tax benefits later as tax free withdraws. Look at your income to see whether you think you will be in a higher tax bracket when you retire.
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Anyone can open a traditional IRA, but there are more limitations when it comes to a Roth IRA. Your income will determine if you can open a Roth IRA, and how much you can contribute.
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A traditional IRA has more penalties for early withdrawal. That doesn’t mean it can’t be accessed in a true emergency but be prepared to pay some fees. Roth, on the other hand, lets you access your contributions without penalty, but this doesn’t include the accrued growth.
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Roth 401(k)—This retirement plan is almost a hybrid of a traditional 401(k) and a Roth IRA. It carries the higher contribution allowance and the early withdrawal penalties of a 401(k). Like the Roth IRA, contributions are made after taxes so that your withdrawals in retirement will not be taxed. Once again, it’s a matter of whether you think taxes will be more favorable now or then.
Non-traditional Investments—Additional methods of investing can be intriguing but come with their own set of risks. Investing in property, art, or other non-traditional investments aren’t recommended in place of investment accounts.
Prioritize your retirement plan this year to help get you on the right path. It’s never too late to save. Talk to your financial advisor or bank representative to create a comprehensive retirement plan.