4 Ways to Save for Retirement
Planning for retirement is crucial for a financially comfortable future. Retirement accounts offer a disciplined approach to savings, allowing you to set aside money exclusively to fund your post-work years. By contributing to these accounts consistently, you can ensure a comfortable retirement.
But where to start? To make informed decisions, it's important to understand some of the most common types of retirement accounts available. Here, we will provide an overview of accounts and their advantages.
#1 - Traditional IRA
Traditional IRAs (Individual Retirement Account) are one of the most common retirement accounts. Contributions to these accounts grow tax-deferred, meaning you don't pay taxes on the gains until you withdraw the funds during retirement, at which point, you’ll owe income tax.
According to Internal Revenue Services (IRS) rules, to be eligible for a Traditional IRA, you must have an earned income (equal to or more than IRA contributions) and be under age 70 ½. Annual contribution limits are currently (2024) $7,000 for individuals under 50 and $8,000 for those 50+. Your IRA contributions may be tax-deductible depending on your income and participation in an employer-sponsored retirement plan. Check out this Nerd Wallet article for a deeper dive into Traditional IRAs.
# 2 - Roth IRA
A Roth IRA is another popular retirement account with unique tax advantages. Contributions are made with after-tax dollars, meaning you've already paid taxes on the money you contribute. The growth of your investments within the account is tax-free, as are qualified withdrawals during retirement.
Like Traditional, Roth IRA contributions limits are currently (2024) $7,000 for individuals under 50 and $8,000 for those 50+. These contribution limits are inclusive to all IRA savings annually. According to IRS rules, to be eligible for a Roth IRA, you need earned income (equal to or more than IRA contributions) and must meet certain IRS income limits, which can change yearly. Currently (2024), the allowed annual gross income maximum is $146,000 for single filers and $240,000 for those filing jointly. Check out this Nerd Wallet article for a deeper dive into Roth IRAs.
#3 - 401(k) Plans
Named after the code governing them, 401(k) plans are employer-sponsored retirement accounts that allow employees to contribute a portion of their paycheck directly to retirement savings. Many employers also offer matching contributions to encourage participation, meaning they will match your contribution up to a certain percentage. According to USA Today, the average 401(k) match was $4,600 in 2023.
When contributing to a 401(k) plan, be sure to familiarize yourself with the vesting schedule. This determines how long you must work for your employer before you have full ownership of their matching contributions. Employers use this tool to ensure that employees who stay with the company longer receive the full benefit of their contributions.
#4 - SEP IRA
SEP (Simplified Employee Pension) IRAs provide a retirement account option for self-employed individuals and small businesses with few or no employees. Contribution limits are currently (2024) the lesser of 25% of compensation or $69,000, according to IRS rules.
Contributions to a SEP IRA are tax-deductible, reducing the account owner’s taxable income for the year. Like Traditional IRAs, the earnings from investments within the SEP IRA grow tax-deferred until the owner makes withdrawals during retirement. Find more on SEP IRAs in this Nerd Wallet article.
Comparing Your Options
Each type of retirement account, including the many not mentioned in this article, offers unique features and benefits, making it your choice to find the one that aligns with your financial goals and needs. Eligibility, your retirement timeframe, and tax treatment will be some of the biggest driving factors when determining which retirement savings structure is right for you.
By understanding the key differences between retirement accounts, considering your financial goals, and evaluating your risk tolerance, you can begin to make an informed decision about the most suitable retirement account for your needs. We encourage you to consult with a financial advisor or tax professional to understand the benefits and rules associated with each account and determine what's the right choice for you.
This article is informational and does not reflect financial recommendations nor tax or investment advice. Account eligibility and contribution limits were pulled directly from the Internal Revenue Service.