When someone mentions retirement, one of the first things you may think about is savings.
And that’s with good reason, of course, because putting your savings to work for you is an important part of any retirement strategy. There are several ways you can do that, and you may have varying levels of knowledge about each — both individual retirement accounts (IRAs) and employer-sponsored plans.
These tools were outlined in recent forbes.com article1, and the first tool mentioned is the traditional IRA, which is something you may have at least a passable understanding of. The easiest way to look at it is that if you’re earning taxable income, you can open your own individual IRA.
If you’re one of those folks who doesn’t have retirement options through your employer, the contributions you make to your traditional IRA are often tax-deductible. The money you make on the earnings is tax-deferred and then when you begin your withdrawals after the age of 59 ½, those distributions are simply taxed as regular income.
In 2020, people may contribute up to $6,000 into a traditional IRA.1 But if you’re a little older — specifically, 50 and up — you may contribute up to $7,000 per year.1 Next up is the Roth IRA. This involves putting post-tax dollars into a retirement account. While the money you put into a Roth IRA isn’t immediately tax-deductible, the great news is you don’t have to pay income taxes on your withdrawals after you’re retired.
Another tool that you can use without needing employer sponsorship is a fixed annuity. At its most basic level, an annuity is simply a contract with an insurance company that may ultimately supplement your retirement savings.1
Fixed annuities are typically easy for many of us to understand and compare against other types of annuities, like indexed or variable. In most cases, fixed annuities have consistently mappable benefits, and reliable tax-deferred growth. Additionally, in some instances, a death benefit may also be paid out to your designated beneficiary after your passing.
Finally, unlike with some other savings tools, annuities don’t come with potentially onerous IRS contribution caps,1 which means you can invest as much as you and your financial services professional are comfortable with.
On the employer-sponsored side, one of the most common tools is the traditional 401(k). You may be familiar with what makes this option tick. But if you aren’t, a traditional 401(k) provides the opportunity to contribute retirement savings with pre-tax dollars. That means your pot of money grows tax-deferred and you don’t pay taxes on your earnings until you retire and begin making withdrawals.
The next thing many employers offer is a Roth 401(k). With this tool, the money you contribute uses after-tax dollars, which makes it different than a traditional 401(k). Accordingly, your eventual withdrawals aren’t taxable income because you paid the taxes on the front end. Roth 401(k)s come with the same contribution limits as traditional 401(k)s. If your company offers a 401(k) match and you’ve chosen to go the Roth 401(k) route, your employer match will be placed into a traditional 401(k) on your behalf due to federal rules.1
When it comes to making the call between a traditional 401(k) and a Roth 401(k), you may want to think about when your taxes are likely to be at their lowest. If you think you’ll be in a lower bracket today, a Roth 401(k) might make sense. But if you think the odds are that you’ll be in a lower bracket when you’re retired, a traditional 401(k) may be an appropriate move.1
This is just a sneak peek at some of the options you have. For a more in-depth look at retirement savings options, you may want to talk to a financial services professional.