Tax-Deferred Accounts: Best Investment Savings Accounts for Retirement
Updated on Oct 15 2019
Many Americans are not prepared for retirement, which is why it’s so important to get educated on retirement savings opportunities. Learn why these tax-deferred accounts are the best investment savings accounts for retirement.
If you were to retire tomorrow, would you have enough money to survive for the years ahead?
If you’re like most Americans, the answer is probably “no.” That’s according to the Northwestern Mutual’s 2018 Planning & Progress Study wherein researchers found that one in three Americans have less than $5,000 in retirement savings.
What’s more, one in five or 21 percent of Americans have no retirement savings at all. And among baby boomers – the generation closest to retirement – only 33 percent have saved between $0-$25,000 in retirement.
Being able to enjoy your golden years without worrying about financial matters and needing to work or rely on family or the government for financial support is no doubt an accomplishment. Sure, there are available financing options for older adults, such as traditional bank loans, cash advance online for bills or to help with medical bills — one of the most expensive costs of retirement. But if you want to boost your retirement savings and have enough to sustain your needs once you quit the corporate world, you should seriously consider getting a tax-deferred savings plan.
Tax-Deferred Savings Plan
One of the best ways to save up for retirement is to create a tax-deferred savings plan. What makes it unique is that you get to defer paying taxes until you take a withdrawal or cash in your investment. It is even more beneficial if you are currently in the high-tax bracket and you think that you will be in the lower tax bracket in the future when you start making withdrawals. Examples of tax-deferred plans are Retirement Arrangements (IRAs) and 401(k) plans, discussed in more detail below.
Types of Savings Account that Best Fit for Retirement
The following accounts let you grow your money tax-free. But of course, they come with certain fees. Taking time to understand each one will help you decide what type of retirement savings plan fits your individual needs.
This is a type of employer-sponsored plan. In this type of account, your personal contributions are automatically deducted from your payroll, which are often “matched” by your employer (although they are not required to do so). Other than tax deferral, 401(k) plans are among the most commonly used retirement plans due to several reasons, such as the portability of the plan, employer matching contributions, and the account holder’s better control of his investments. Employees of non-profit organizations are also offered with this type of savings account, in the form of 403(b).
If you are self-employed or a sole proprietor and you want to benefit from the 401(k)-retirement plan, you should choose the “Solo” account. This allows you to make contributions to your savings plan both as an employer and employee. The Solo 401(k) only covers business owner(s) and their spouse(s). individuals who qualify under this plan can receive the same tax benefits as in a general 401(k) plan.
Individual Retirement Account (IRA)
An employer-sponsored program may not be enough to help you achieve the savings you need. You can pay, for instance, a 401(k) with an IRA. It can consist of various financial products such as stocks, bonds or mutual funds. There are different types of IRA accounts:
SEP IRA Another alternative retirement plan available to self-employed individuals and business owners, the SEP IRA is easy to set up and involves low administrative responsibilities. It can be converted into 401(k) in case you decide to do so in the future as the latter may provide a larger contribution and tax deduction compared to a SEP IRA.
Simple IRA Another employer-sponsored retirement savings plan, this is available to companies that have 100 or fewer employees. It stands for Savings Incentive Match for Employees. Contrary to 401(k), the employer only has two options. It’s either they match the contributions of their employees, up to up to 3 percent of their salary or they make contributions equivalent to 2 percent of the salary of each employee whether or not they choose to participate in the plan.
Roth IRA Contributions to a Roth Ira are not tax-deductible but eligible distributions are tax-free. And unlike traditional IRAs, there is no mandatory withdrawal at the age of 70. You can withdraw the amount you contributed, not the earnings without any charge or penalty.
Health Savings Account
Designed for individuals with high-deductible health plans, a health savings account is a relatively new retirement plan that can be used to pay for out-of-pocket medical expenses. Contributions to HSA can be made via payroll deductions, as well as from your own funds. You can withdraw your contributions at the age of 65 without penalty but you have to pay the income taxes, except for qualified medical expenses (which makes it different from the 401(k).
Get Your Retirement Savings on Track
Your future is important which is why you should make your retirement savings a priority; especially if you are getting closer to retirement. The longer you wait, the harder you have to work in order to accumulate enough savings needed for your future.
An expert financial advisor who is a fiduciary can help you develop a financial portfolio that aligns with your retirement goals and lifestyle. Consider connecting with a qualified financial advisor today.
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