While it can be thrilling to imagine your retirement, many find building your nest egg overwhelming.
There are many retirement plans available. There are many retirement plans available. A long-term financial plan is the best way to feel confident in your retirement savings. You should also have a fiduciary financial professional on your team.
This article will provide a guide on the most popular retirement account types, their workings, and who they might be best for.
It is difficult to choose the best savings vehicle. When you're planning your retirement, there are many factors to consider: your age, your income and the ideal tax-optimization strategy. These are common retirement plans and criteria that you should consider.
Tip: Use our free personal finance tools to help you plan your retirement. Personal Capital's Retirement Planner is a good place to begin. It will help you evaluate your retirement readiness and pinpoint areas that need improvement.
1. Traditional 401k
The 401k is one of the most well-known and popular investment tools. It's an employer-sponsored retirement plan that allows you to save tax-free for retirement.
Continue reading What's a 401k, anyway? – A Comprehensive Guide
Traditional 401k contributions are made using pretax dollars. This reduces your taxable income, and allows your contributions to grow tax-deferred up until retirement.
The contribution limit for 2022 is $20,500 (222,500 in 2023), while individuals 50 years and older may contribute an additional $6,500 (7,500 in 2023).
Employers might offer a profit sharing or employer match program, where they contribute a percentage to your 401k plan. Employers may have different vesting requirements. For example, if you are employed for a specific number of years, employers can use that. Contributions made by your employer can be 100% vested immediately. This means that you have full control of the money once it has been applied to your 401k account. To receive the match benefit from your employer, an employer may require that a percentage or a certain amount of your salary be contributed to your401k. You should contribute at least that amount.
To avoid penalties when withdrawing contributions from your retirement plan, consult your financial advisor. Withdrawals from 401ks made before the age of 59 1/2 are subject to a 10% penalty and ordinary income taxes, which are taxed at your highest marginal rate. There are some IRS exceptions to the early withdrawal penalty. However, withdrawing money from your 401k before the age of 59 1/2 or 72 (for Required Maximum Distributions) is not recommended.
Ideal for: A traditional 401k plan is a good option if you believe you will be in lower marginal tax brackets when you withdraw funds in retirement.
2. Roth 401k
Some employers offer an Roth401k option to employees in addition to traditional 401k plans. Roth 401k contributions, which are made with after-tax money, provide tax-deferred growth and tax-free withdrawals, as long as the rules are followed.
Roth 401k users have the same options as traditional 401ks. They can contribute up $20,500 in 2022. Individuals over 50 may also contribute an additional $6,000.
Individuals who withdraw from their Roth 401k before turning 59 1/2 could be subject to a 10% withdrawal penalties on a portion. A Roth 401k is subject to Required Minimum Distributions (RMD), which are mandatory starting at 72.
These retirement accounts are perfect for people who think they will be taxed less in the future than they are now. Individuals aged 59 1/2 and older can use a Roth 401k account to avoid paying taxes on withdrawals. They can also continue growing their accounts tax-free. You can also avoid RMDs by rolling your plan into a Roth IRA once you are 59 1/2 years old or no longer work for the employer. Roth accounts can be a powerful legacy planning tool.
3. Traditional IRA
Are you sure that your 401k contributions are maxed? Is your employer offering a 401k or matching program? An Individual Retirement Account (IRA) is a great option for you and your retirement goals if this is the case.
Traditional retirement accounts are retirement accounts you open yourself (not through your employer) and that you fund with eligible earned income.
You can contribute to an IRA even if your employer has a 401k plan. You should be aware of the income limitations for contributions.
Individuals can contribute up $6,000 in 2022 (if you're 50 or older) or $6,500 (2023 if you're 50 or older).
Your income level may affect whether you are eligible to deduct some or all of your contributions.
- Joint filers can get a full deduction up the limit of the employer-sponsored retirement plan if neither spouse is eligible.
- You can claim a partial deduction if you file as a single, or head of household, and your employer-sponsored retirement plan covers you. If your income in 2023 is $73,000 to $83,000, you can claim a partial deduction. Single filers with a MAGI greater than $83,000 in 2022 are not eligible for a deduction.
- You can deduct the entire amount if you are married or a widow(er) and you file jointly under an employer-sponsored retirement program. If your income in 2023 is between $116,000 to $136,000, you can claim a partial deduction. If you earn more that $136,000 in 2023, there is no deduction.
- Married filing separately can be eligible for a partial deductible if your MAGI falls below $10,000
In general, all withdrawals from a traditional IRA are subject to both federal and state income tax. As with traditional 401ks a 10% penalty is applied to any withdrawals made before the age of 59 1/2. There may be exceptions so make sure to consult your financial advisor before you withdraw from your IRA.
Ideal for: Traditional retirement accounts are best for people who have exhausted their 401k plans and don't have access to employer-sponsored retirement plans. IRAs offer more investment options, such as individual stocks or ETFs. However, the 401k plans might only have a limited number of funds.
4. Roth IRA
Roth IRAs are different from traditional IRAs. They offer tax-deferred growth, and no taxes for withdrawals when the right circumstances apply. Roth IRA contributions can't be deducted from income taxes.
Contributions to a Roth IRA can be made even if you have a traditional IRA or 401k plan. You should know that if you make contributions to both a Roth IRA and a traditional IRA, the yearly limit applies to both. The total contribution cannot exceed the limit.
These are the contributions limits you can make in 2023.
- Single tax filers with a 2023 MAGI less than $138,000 will have the ability to contribute up to $6,500. If you are 50 years old or older, your contribution limit will increase to $7,500. Single filers with MAGI between $138,000 to $153,000 will see the contribution limit gradually reduce. Roth IRA contributions are not available for those with MAGIs greater than $153,000.
- If your 2023 MAGI falls below $218,000, married couples filing jointly can contribute up to $6,500 per year. The maximum annual amount for those 50 years and older is $7,500 For married couples with a MAGI of between $218,000 to $228,000., the Roth IRA contribution limit begins to decrease and is phased out. Those with a MAGI of more than $228,000 are not eligible to contribute to a Roth IRA.
- Married couples who file separately with a MAGI exceeding $10,000 will not be eligible for a Roth IRA. Contributions at a lower level will be available to those with a MAGI of less than $10,000.
- If a tax filer reports as head or married filing separately but has not lived with their spouse for the past year, they will be allowed to follow the rules and limits applicable to single filers.
You can convert funds from a traditional IRA or 401k plan to a Roth IRA. Conversions from other retirement accounts do not affect your 2023 contribution limit. However, they may increase your MAGI and trigger a phaseout in your Roth IRA contribution amount. People who have income restrictions and aren't eligible for Roth contributions can convert dollars from their traditional retirement plans. Discuss this possibility with a tax professional or accountant to determine if it is a good fit for your financial plan.
Ideal for: RothIRAs allow retirement savings to grow tax-free and can be withdrawn tax-free at any time. Roth IRAs are also free to be left alone. There are no minimum distributions (RMDs), so you can leave them as an inheritance or use them as a future nest egg. If you believe your retirement tax bracket will be higher, Roth accounts can be a good investment tool. It's best to pay taxes now if you believe you will be taxed more in retirement.
5. SEP IRA
SEPIRAs (Simplified Employer Pension) could be another tool to help you reach retirement goals. SEP IRAs, which are profit-sharing plans, allow business owners to contribute to their employees' retirement savings as well as their own. Employers can make tax-deductible contributions for their employees through a SEP IRA.
SEP IRAs must include employees over 21 who have worked in the same employer for at least 3 years and have received compensation of at least $600 from the employer for the year. However, some plans have more restrictive eligibility requirements.
SEP IRA contribution limits can be higher than traditional IRA limits. Contributions cannot exceed 25% of eligible compensation, or $66,000 in 2023. Important to remember that contributions cannot exceed 25% of eligible compensation or $66,000.
SEP IRAs have many contribution rules and guidelines. Talk to a financial advisor or visit the IRS Guidelines page.
Ideal for: Small business owners often don't have enough employees to cover a full-fledged 401k. A SEP IRA can be a great option because it has minimal administration costs.
6. SIMPLE IRA
SIMPLEIRAs (Savings Incentive Match Plan for Employees) is another option that small business owners have. These are a great option for small businesses with less than 100 employees who don't have a retirement plan. They are easy to set up and can be used by any business that has less than 100 employees. If the SIMPLE IRA is being set up, an employer cannot have another retirement plan.
SIMPLE IRAs are similar to a company-sponsored 401k. Employees can contribute via salary deferrals.
The deferral limit on a SIMPLE IRA will be $15,500 in 2023.
Employers are required to contribute a match contribution of up to 3% to the employee's compensation each year. This is based on an eligible compensation amount of $330,000 in 2023.
The following are eligible employees: Those who have earned at least $5,000 in any two years prior to the current calendar calendar year, and those who expect to earn at least $5,000 during this calendar year. You should consult a financial advisor before you withdraw from your retirement account. SIMPLE IRAs can have special penalty.
Ideal for: SIMPLEIRAs are ideal as a start up retirement savings plan for small businesses (less than 100 employees), that do not have a retirement plan. SIMPLE IRAs are typically lower than traditional retirement savings plans in terms of administrative and start-up costs. SIMPLE IRAs don't require filing, so they are easier to manage than other traditional retirement savings vehicles.
7. Self-Directed IRA
Self-Directed IRAs have similar eligibility requirements to traditional and Roth IRA options. They also follow the same contribution guidelines. Self-Directed IRAs permit investors to have assets such as private-held securities, real estate, and gold.
An investor must partner with a trustee to establish a Self-Directed IRA.
It is important that you know that certain investments, such as collectibles or life insurance, are prohibited by the IRS.
The best option for: Traditional or Roth IRAs offer simpler ways to achieve your retirement planning goals.
8. 457
Similar to 401k plans 457 plans can be offered by state, local governments, and non-profits. 457 plans can also be funded by payroll deductions. This means that the employee will get tax-deferred growth up to withdrawals.
The contribution limit for 457 plans will be $22,500 in 2023. Employees 50 years and older can add a $7,500 catch-up provision to their contribution limit.
The key difference with 457 plans is that early withdrawals prior to age 59 1/2 are exempt from penalties but still subject to ordinary income tax rates.
Participants nearing retirement may be able to make up for years they didn't contribute to the 457 plan. The IRS contains more information on 457 plans. However, it is advisable to consult the plan administrator regarding withdrawal and contribution guidelines.
9. 403(b)
403 (b) plans are retirement plans that certain employees of public schools or tax-exempt 501(c). The 403(b), which allows employees to contribute some salary to the tax-deferred plans, is also available for employers.
The following are eligible employees for the 403(b), plans: Employees who work in public schools, state universities, churches, or certain ministries.
Similar to traditional 401ks and 457s or IRAs. 403(b), retirement plans allow employees the opportunity to save for retirement. The funds will not be subject to tax until they are withdrawn.
Roth contributions are also available in 403(b), 457, and 457 plans.
Tip Personal Capital now provides retirement plan advisors as part our holistic wealth management services.
Considerations when choosing a retirement plan for 2023
There are many options available for retirement savings vehicles, as you can see. We recommend that you consult a financial advisor to determine the best investment tools for you, based on your employer's offers, your income level, and your tax-optimization goals.
These are just a few ideas:
- Take a look at the power of time to help you retire with our study on balances in 401k by age
- Learn 7 Essential Steps to Retirement Planning
- Sign up for Personal Capital to get a complete view of your finances, including retirement funds, and receive free financial tools
- Calculate your retirement readiness today
Frequently Asked Questions
How to Open a Precious Metal IRA
It is important to decide if you would like an Individual Retirement Account (IRA). To open the account, complete Form 8606. For you to determine the type and eligibility for which IRA, you need Form 5204. This form should not be completed more than 60 days after the account is opened. Once this has been completed, you can begin investing. You can also choose to pay your salary directly by making a payroll deduction.
You must complete Form 8903 if you choose a Roth IRA. Otherwise, the process will look identical to an existing IRA.
To qualify for a precious-metals IRA, you'll need to meet some requirements. You must be at least 18 years of age and have earned income to qualify for a precious metals IRA. Your earnings cannot exceed $110,000 per year ($220,000 if married and filing jointly) for any single tax year. And, you have to make contributions regularly. These rules apply whether you're contributing through an employer or directly from your paychecks.
You can use a precious-metals IRA to purchase gold, silver and palladium. However, physical bullion will not be available for purchase. This means that you will not be allowed to trade shares or bonds.
Your precious metals IRA may also be used to invest in precious-metal companies. This option is available from some IRA providers.
However, investing in precious metals via an IRA has two serious drawbacks. They aren't as liquid as bonds or stocks. It's also more difficult to sell them when they are needed. Second, they don't generate dividends like stocks and bonds. You'll lose your money over time, rather than making it.
Should You Buy Gold?
Gold was once considered an investment safe haven during times of economic crisis. However, today many people are turning away from traditional investments such as stocks and bonds and instead looking toward precious metals such as gold.
The gold price has been in an upward trend for the past few years, but it remains relatively low compared with other commodities like silver or oil.
Some experts think that this could change in the near future. According to them, gold prices could soar if there is another financial crisis.
They also point out that gold is becoming popular because of its perceived value and potential return.
These are some things you should consider when considering gold investing.
- First, consider whether or not you need the money you're saving for retirement. You can save for retirement and not invest your savings in gold. That said, gold does provide an additional layer of protection when you reach retirement age.
- Second, ensure you fully understand the risks involved in buying gold. Each one offers different levels security and flexibility.
- Last but not least, gold doesn't provide the same level security as a savings account. If you lose your gold coins, you may never recover them.
You should do your research before buying gold. You should also ensure that you do everything you can to protect your gold.
What is the Performance of Gold as an Investment?
Supply and demand determine the gold price. Interest rates can also affect the gold price.
Due to limited supplies, gold prices are subject to volatility. Additionally, physical gold can be volatile because it must be stored somewhere.
Can I purchase gold with my self directed IRA?
Although you can buy gold using your self-directed IRA account, you will need to open an account at a brokerage like TD Ameritrade. Transfer funds from an existing retirement account are also possible.
The IRS allows individuals up to $5.500 annually ($6,500 if you are married and filing jointly). This can be contributed to a traditional IRA. Individuals can contribute up to $1,000 annually ($2,000 if married and filing jointly) directly to a Roth IRA.
If you do decide you want to invest your money in gold, you should look into purchasing physical bullion instead of futures contracts. Futures contracts can be described as financial instruments that are determined by the gold price. These financial instruments allow you to speculate about future prices without actually owning the metal. Physical bullion, however, is real gold and silver bars that you can hold in your hand.
What is a Precious Metal IRA and How Can You Benefit From It?
You can diversify your retirement savings by investing in precious metal IRAs. This allows you to invest in gold, silver and platinum as well as iridium, osmium and other rare metals. These metals are known as “precious” because they are rare and extremely valuable. These are good investments for your cash and will help you protect yourself from economic instability and inflation.
Precious metals are sometimes called “bullion.” Bullion refers actually to the metal.
You can buy bullion through various channels, including online retailers, large coin dealers, and some grocery stores.
You can invest directly in bullion with a precious metal IRA instead of buying shares of stock. This will ensure that you receive annual dividends.
Precious metal IRAs do not require paperwork nor annual fees, unlike regular IRAs. Instead, you pay only a small percentage tax on your gains. Plus, you get free access to your funds whenever you want.
Can I hold physical gold in my IRA?
Gold is money, not just paper currency or coinage. It's an asset that people have used for thousands of years as a store of value, a way to keep wealth safe from inflation and economic uncertainty. Investors today use gold to diversify their portfolios because gold is more resilient to financial turmoil.
Many Americans now invest in precious metals. Even though owning gold is not a guarantee of making money, there are many reasons why you might want to add gold to your retirement savings portfolio.
Another reason is that gold has historically outperformed other assets in financial panic periods. Gold prices rose nearly 100 percent between August 2011 and early 2013, while the S&P 500 fell 21 percent over the same period. During those turbulent market conditions, gold was among the few assets that outperformed stocks.
Gold is one of the few assets that has virtually no counterparty risks. Your shares will still be yours even if your stock portfolio drops. If you have gold, it will still be worth your shares even if the company in which you invested defaults on its debt.
Finally, gold is liquid. This means you can easily sell your gold any time, unlike other investments. Gold is liquid and therefore it makes sense to purchase small amounts. This allows you to profit from short-term fluctuations on the gold market.
Statistics
- If you take distributions before hitting 59.5, you'll owe a 10% penalty on the amount withdrawn. (lendedu.com)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (smartasset.com)
