A 401(k) is a powerful retirement planning tool. If you have access to such a program through work, it is wise to use any Employer Match. If you have money left over, there are other ways to save for retirement.
Retirement planning ensures that individuals will spend their golden years comfortably, so understanding the ins and outs of this practice is crucial. This article describes some of the other options available to you to get the most out of your retirement planning strategy and reduce your tax burden.
The central theses
- Try to maximize your 401(k) each year and take advantage of all your employer’s offers.
- Contributions are tax deductible in the year you make them, which can leave you with more money to save or invest.
- Once you’ve exhausted your 401(k), you should deposit your leftover money into an IRA, HSA, retirement, or taxable account.
401(k) Employer Agreement
Many employers offer 401(k) plans to their employees. And they can even match posts to sweeten the pot. This means that for every dollar you pay into your employer-sponsored plan, the company pays a certain percentage. This will increase the amount of money stored in your account. Some cover up to 50% of your contribution, while others make a dollar-for-dollar match up to a certain limit.
Employers typically adjust Roth 401(k) plans at the same rate as traditional 401(k) plans. However, some employers do not offer Roth 401(k) plans. A notable difference between traditional and Roth 401(k) contributions is that the employer contribution is paid into a traditional 401(k) plan and is taxable when paid out. The employee’s contribution portion is filed in a Roth 401(k).
Some financial planners may encourage investors to maximize their 401(k) savings. On average, individuals make about $0.50 per dollar, for a maximum of 6% of their salary. That’s the equivalent of an employer writing a check for $1,800 to an employee who makes $60,000 annually. Furthermore, the $1,800 is essentially free money and can grow over time by investing in the financial markets.
You don’t have to be an investment professional
Although 401(k) offerings can be difficult for laypeople to understand, most programs offer low-cost index funds that are ideal for new investors. As individuals approach retirement age, it is prudent to change their asset allocation by reallocating some of their retirement savings from stocks or stocks into bond funds. Many adhere to the following age-based attribution model:
- Invest 30% of retirement money in retirement funds by age 30.
- Invest 45% of retirement money in retirement funds by age 45.
- By age 60, put 60% of your retirement money in retirement funds.
Those who reject the age-based approach can instead opt to invest in target date funds, which offer investment diversification without having to pick every single investment.
“Target date funds also tend to be more conservative closer to the selected date. The combination of these benefits can make this a one-stop shop for 401(k) participants,” said David S. Hunter, CFP and President of Horizons Wealth Management .
Invest after you’ve maxed out your 401(k).
Those who put the maximum dollars into their 401(k) plans can top up their retirement savings with a variety of investment vehicles. We have listed some of them below.
Individual Retirement Accounts (IRAs)
You can put up to $6,000 in an IRA in 2022 and up to $6,500 in 2023, as long as your earned income is at least that much. If you’re 50 or older, you can add an additional $1,000 in either year, although some IRA options come with certain income restrictions.
If you make too much money, you cannot contribute to a Roth IRA. If you earn more than a certain amount and are covered by a workplace plan, you cannot deduct contributions to a traditional IRA.
Traditional IRA income limits
The deduction of a traditional IRA contribution is subject to income caps if you are covered by a retirement plan at work.
For single taxpayers, the phase-out of the deduction starts at a modified adjusted gross income (MAGI) of $68,000 and disappears entirely when your MAGI is $78,000 or more for 2022. That range increases to $73,000-$83,000 in 2023. For those who are married and filing jointly, with the IRA contributing spouse having a company pension plan, the phasing starts at $109,000 and ends at $129,000 ($116,000 and $136,000 in 2023).
If you are not eligible to deduct all or part of your traditional IRA contribution, you can still contribute up to the contribution limit. Your investment continues to grow on a tax-deferred basis.
Roth IRA income limits
Contributing to a Roth IRA also includes income restrictions and spills. But unlike traditional IRAs, the limit determines your eligibility to contribute.
For single taxpayers in 2022, the income exit starts at a MAGI of $129,000 and ends at incomes above $144,000 ($138,000-$153,000 in 2023). For jointly filing married taxpayers, the exit starts at a $204,000 MAGI and ends all the way above a $214,000 MAGI ($218,000 and $228,000 in 2023).
health savings accounts
Health Savings Accounts (HSAs) are available to individuals with high-deductible health plans (HDHPs), whether they access them through their employers or purchase them independently. Contributions are paid on a pre-tax basis.
When used for qualifying medical expenses, withdrawals from the account are tax-free. And because users aren’t forced to withdraw funds at the end of each year, HSAs can function like another retirement plan, making them ideal vehicles for saving on health care expenses in retirement.
For 2022, the Internal Revenue Service (IRS) defines a high-deductible health insurance plan as one with a minimum annual deductible of $1,400 for deductible ($1,500 in 2023) or $2,800 for family insurance ($3,000 in 2023).
Also, for a high-deductible plan, annual expenses (such as deductibles, co-payments, but no premiums) will not exceed $7,050 for self-insurance or $14,100 for family insurance for 2022, but for 2023, do not exceed $7,500 for self-insurance or $15,000 $ for family insurance.
Contribution limits for 2022 are $3,650 for an individual and $7,300 for a family; however the 2023 The contribution limit is $3,850 for individuals and $7,750 for families. The catch-up contribution for those who are 55 years old for 2022 and 2023 is an additional $1,000.
Taxable investments are a viable way to accumulate retirement savings. While dividends and capital gains are taxable, long-term capital gains on investments held for at least one year are taxed at preferential rates.
Once you’ve exhausted your 401(k), pay attention to the location of assets to ensure investments are held in taxable accounts rather than tax-deferred accounts.
Annuities often get a bad rap – sometimes rightly so. Still, a variable annuity can be another vehicle that increases after-tax contributions on a tax-deferred basis.
Variable annuities generally have sub-accounts similar to mutual funds. Later, the contract holder can annul the contract or repay part or all of it, with the gains being taxed as ordinary income.
Please note, however, that many contracts have onerous fees and significant exit fees. If you are considering a variable annuity, do thorough due diligence and seek help from a financial advisor beforehand.
How much do you need to save for retirement?
The amount a person needs to save for retirement depends on their current lifestyle, the lifestyle they want in retirement, expenses, health, and dependents. One suggestion is to divide the desired income you will need in retirement by 4%. For example, if you need $70,000 in annual income, you need an annuity of $70,000/0.04 = $1.75 million.
What Are 4 Joint Retirement Plans?
Common retirement plans include 401(k)s, Traditional and Roth IRAs, SEP IRAs, SIMPLE IRAs, and Solo 401(k)s.
What is the best retirement plan?
One of the best retirement plans is a 401(k) plan. Not everyone has access to a 401(k) as it must come from an employer and not all employers provide them; However, 401(k)s have high contribution limits, are tax-deferred, and many employers match employee contributions.
The final result
When it comes to your future, investing is always a good thing. Diligent savers who are maxing out their 401(k) contributions have other retirement options available.