The days of banking on work pension plans and social security are nearly at an end. There’s a reason why now, more than ever, saving money for retirement is an imperative. If you’re doubting your ability to do so, or if you’re simply trying to gain the knowledge that will help you plan for the future, then you’re in the right place. You’ve already made the first leap—beginning your research.
The truth of the matter is that there is no one way to save for retirement. You could start a side hustle and put all that money in a shoebox, invest in stocks, follow a more traditional route, or doing anything in your power to put away savings, and it would be infinitely better than lagging and disregarding the need for a retirement fund. And seriously, it is never too late to start. Even if you have reached midlife, it is amazing how much you can change your circumstances if you make a commitment to saving right now.
Types Of Retirement Savings Accounts Explained
The 401k is often considered the easiest, simplest, and best way to begin your retirement savings. It’s offered by your employer and every month a percentage of your paycheck will go towards this fund. Dependent on your employer’s terms, they will ‘match’ your percentage with a certain amount of their own capital. Typically reserved for for-profit companies, the 401k can be rolled over to your next place of employment or into an IRA. This is the type of account that you create, manage, and then leave alone until the time calls for you to access it. You can also access the funds before retirement, although you will experience hefty penalties.
If you’re feeling like you need to change your ways and start building infrastructure for future retirement, consider an IRA. This is another government-supported retirement account that functions similarly to the 401k. Thing is, the amount you can contribute to an IRA is less than that of a 401k, which minimizes the funds you can withhold from payroll. Lastly, it’s important to note that you can’t deduct your IRA contributions from your taxable income if you’ve made more than $71k as a single filer or $118k as a joint filer (married). You must be careful, however, as administrative and account fees can add up. It’s paramount you conduct an IRA fee comparison if you’re considering starting an IRA account.
A Roth IRA functions differently than the standard IRA, as your contributions are composed of after-tax dollars and you can’t deduct the money you put into it from your taxable income. With that being said, the money accumulated grows without being taxed, nor do you pay tax once you pull the funds out for retirement (after the age of 59 and 1/2). Additionally, you can withdraw the money you contributed at any point in time without having to pay a penalty—although you can’t withdraw the earnings of the account. The limitations often arise from a person’s income, as if you make too much (over $131k as a single filer) then it makes more sense to use a traditional IRA. In reality, it comes down to the budget you set for your retirement account and how much you are willing to contribute annually.
Health Savings Account
One of the least focused-on types of retirement accounts is an HSA. Unfortunately, medical complications can beget aging. A person’s retirement account can easily evaporate beneath the weight of medical bills, especially if serious problems are to arise. Thus, investing in a health savings fund is mutually exclusive to preparing for retirement. Better yet, it’s a retirement account that is tax-free. If you use the money for valid medical expenses, then any withdrawal is exempt from tax.
Furthermore, the funds roll over for future use, and after you turn 65 you can withdraw the money without medical-related cause—although you will pay income tax on this withdrawal. If you have a family, those you claim as ‘dependents’ can benefit from the account, as you can use the money for their medical bills. Lastly, if you save your medical receipts that you paid for out-of-pocket, you can reimburse yourself in the future.
Preparing for the future is a necessary practice, and the main way to do so is by establishing a retirement savings account. Do your research, identify what financial bracket you fit in, and use that information to establish which type of account is right for you.