How to Save for Retirement
There are very specific types of accounts that you can use for retirement. These accounts have a few key attributes:
● Tax-advantaged. These accounts have certain tax benefits, such as tax deferrals.
● Limited access. Unlike a traditional savings account or a high-interest money market account (HIMMA), these long-term saving accounts limit access to your funds until you reach a certain age.
● Contribution limits. You can only contribute up to a certain amount each year, and each account type has a specific limit.
Most retirement types, whether employer-sponsored or self-funded, offer two options:
● Traditional. This account is both tax-deductible and tax-deferred. This means that your contribution is subtracted from your overall taxable income, which can help you save money at tax time, and you don’t pay taxes on your earnings until you withdraw the funds post-retirement.
● Roth. A Roth account uses taxed income to build your fund. However, when you’re ready to remove your funds, you won’t owe any taxes because you will have paid them already.
Here are some of the most common types of retirement funds.
Employer-Sponsored Retirement Fund
If your employer offers a retirement fund (often called a 401(k)), you can automatically deposit a percentage of your pay into your retirement fund with every paycheck. It’s an easy way to save because it happens automatically, and you can customize your deposits. An additional benefit of an employer-sponsored fund is an employee match: The employer may offer to “match” your contribution up to a certain amount.
Here’s an example. Let’s say you get paid $75,000 a year, and your employer offers up to a 4% match on your 401(k). That’s $3,000 extra a year toward retirement if you take the highest match, making it a total of $6,000 annually. Maxing out your employer’s match is always recommended since it’s considered “free money” that doesn’t count towards your contribution limit.
An IRA is a self-managed, self-funded retirement account held at a major financial institution. The funds are tax-deductible and tax-free until withdrawal.
There are two major differences between an IRA and a 401(k): An IRA offers a wider variety of investment options, so you can curate your portfolio exactly how you want. However, IRAs have much smaller contribution limits than 401(k)s.
Take a look at Keesler Federal’s IRA options
Your IRA Options
There are two primary types of IRAs that can be used as a tool to build your retirement fund:
● Traditional IRA4: Available to anyone who earns, or whose spouse filing jointly earns taxable compensation, until the age of 70 ½. There is no earning limit to utilize a Traditional IRA, and you must start withdrawing funds at age 70 ½. Withdrawals made after age 59 ½ are taxed as regular income, and withdrawals made before this age are subject to taxes and a 10% penalty fee.
● Roth IRA: Available to anyone who earns or whose spouse earns taxable compensation, no matter the age. In order to use a Roth IRA, you must earn less than $153,000 filing single, or less than $218,000 filing jointly5. Contributions are not tax deductible, and funds can be withdrawn tax-free after age 59 ½ as long as the account has been open for at least 5 years. If funds are drawn before age 59 ½, these withdrawals will be taxed and subject to a 10% penalty fee.
Saving for retirement is an important financial goal that will set you up for life down the road, whatever that may look like. Learn more about how to save for retirement here. And if you need a little extra help, Keesler Federal’s financial advisors are here to support you. Learn more