How to choose the right retirement savings plan

While Americans know they need to save for retirement, many are still short.

A survey by the Insured Retirement Institute found that more than half of American workers between the ages of 40 and 73 have less than $ 50,000 earmarked for their golden years. About 6 out of 10 save less than 10% of their income.

In order to stop working, you need to make sure you put enough aside. The general rule is about 15% of your income, although if you can’t save that much, it will help a bit.

There are different ways to save depending on your situation. An employer-sponsored plan, such as a 401 (k) plan, or an individual retirement account (either traditional or Roth) are the most popular options.

They have different rules, although each offers some form of tax advantage.

Here are the factors to consider when figuring out the best option for your situation.

Contributions to a traditional retirement plan sponsored by your employer, usually a 401 (k), are automatically deducted from your salary, before taxes. This reduces your taxable income each year. Instead, the tax is contracted when retired funds are withdrawn. Therefore, the rate will depend on your tax bracket at that time.

The big advantage of the 401 (k) is that you can save up to $ 19,500 by 2021, regardless of income, said Chris Hogan, a personal finance expert who authored “Retired Inspired” and “Everyday Millionaires.”

In the meantime, with IRAs you can only contribute $ 6,000 this year. If you’re 50 or older, you can save an additional $ 6,500 on your 401 (k) this year or an additional $ 1,000 on your IRA.

Your company may also offer a Roth 401 (k), which means that contributions are made after taxes and you will not be charged for retirement withdrawals.

Hogan prefers the Roth 401 (k).

“That means a tax cut of almost $ 20,000 every year,” said Hogan, who is also affiliated with financial education and media firm Ramsey Solutions and hosts an online program, “The Chris Hogan Show”.

In fact, a Roth 401 (k) essentially saves more money than a traditional plan, said Pete Hunt, a certified financial planner and director of customer service at Essential Wealth Advisors, based in Charlotte, North Carolina. .

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Hunt said $ 19,500 (or $ 26,000 if they are over 50) of money after taxes “is much more valuable than the same amount in dollars before taxes, especially for many years.”

If your employer matches a certain percentage of your 401 (k) contributions, try to contribute at least up to that match, advisors say. Company money will be added before taxes, tax or not your contributions.

When you reach the age of 72, you should start taking a mandatory annual minimum distribution, or RMD, of your 401 (k).

Contributions to the Roth IRA are also made after taxes, so you don’t have to pay taxes when you withdraw money in retirement.

However, there are income limits. You can contribute up to $ 6,000 (or $ 7,000 if you’re 50 or older) if you earn less than $ 198,000 if you’re married and filing together, or less than $ 125,000 if you’re single. You can contribute a small amount if you earn between $ 198,000 and $ 208,000 if you are married or between $ 125,000 and $ 140,000 if you are single.

Experts advise creating a Roth IRA when you’re young, because you may not meet the requirements when you’re older and earn more money.

You may also see higher tax rates in the future.

“I recommend it to all my clients, unless they are in a situation where they think they will earn significantly less in the future,” Hunt said.

There is also no RMD with Roth IRA and you can withdraw your contributions at any time, without taxes or penalties. In general, you cannot earn income until the age of 59½. You usually also have more investment options than in a 401 (k).

Nor should it be any of the situations. If you have a 401 (k) but also qualify for a Roth IRA, do both, Hunt said.

First, contribute up to the employer’s match for the 401 (k). Then I recommend putting money in a health savings account, if you have a very deductible health care plan. After that, put money into a Roth, which has more flexibility, he said.