The U.S. government wants you to save for retirement. That’s why it allows many retirement accounts tax advantages and other features that boost your savings. IRAs and 401(k) plans are ubiquitous for most Americans. They share some features, but also differ in important ways. And since each comes in a traditional and Roth version, it is likely you’ll be able to find a plan that suits your needs.
Here are some ideas to supercharge your ability to your retirement savings efforts:
- 401(k) Accounts and Other Employer-Sponsored Plans. If your employer offers a 401(k) or 403(b) or 457, aim to max out your retirement savings. For anyone under 50, the 2021 annual contribution limit is $19,500. Those 50 and older can contribute an extra $6,500 per year, for a total of $26,000. Remember, all the income that you contribute to a 401(k) is tax deferred, and the funds in the 401(k) compound tax-free. You will have to pay income tax on the withdrawals you take from the plan in retirement.
- Traditional IRAs. Anyone under the age of 70 ½ is allowed to contribute to a traditional individual retirement account, or IRA. Contributions to traditional IRAs are generally tax deductible.
- Roth Alternatives. Roth IRAs and Roth 401(k)s offer different tax advantages from their traditional counterparts. Contributions to Roth retirement accounts are made with after tax dollars, meaning you can’t deduct them. However, withdrawals are tax-free and penalty-free, so long as you’ve held the account for at least five years and are 59 ½ or older. There are no required minimum distributions with Roth plans, and you can continue contributing to a Roth account in your 70s and beyond – providing you have earned income and meet eligibility requirements.
- Accounts for Small-Business Owners and Self-Employed. Self-employed workers and small business owners can invest in traditional or Roth IRAs, but there are other options that may serve them better, depending on the situation.
- Using more than one plan. Contributing to two retirement accounts is a great way to maximize your tax-advantage savings. One option is to contribute to both a 401(k) and a Roth IRA. That way, you get tax-deferred savings on up to $26,000 per year, if you’re 50 over. Finally, if you don’t have access to a 401(k), you can contribute to both a traditional IRA and a Roth IRA, but your combined contributions cannot exceed the $6,000 annual limit ($7,000 for those 50 or older).
Your employer can help you manage work-place-plan contributions. Enrollment is typically an easy process. Your contributions will be deducted from your paycheck, eliminating any temptation to spend the cash.