We’re already halfway through 2018. Have you saved as much money as you’d like for retirement this year? Or are you behind on hitting your savings target? It’s easy to get behind on savings, especially when it comes to retirement, which may be years or decades in the future. After all, you probably have many other expenses and financial challenges that seem more urgent.
The good news is you still have six months left in the year to put money away. Qualified accounts may be your most effective savings vehicles. These accounts include things like 401(k) plans and individual retirement accounts (IRAs). They allow you to grow your funds on a tax-deferred basis, which means you don’t pay taxes on growth while the assets are inside the account.
Below are three commonly used qualified accounts and how you can use them to ramp up your savings in the second half of 2018. You still have time left this year to boost your savings. Work with a financial professional to implement a savings strategy.
Employer-Sponsored Retirement Plan
Your employer’s retirement plan could be your most effective savings vehicle. These accounts are usually set up as 401(k) plans, but they could also be 403(b) or 457(b) plans if you work at a nonprofit or government organization. Your funds grow tax-deferred, which means you don’t pay taxes on the growth until you take distributions. That could help you accumulate funds faster than you would in a taxable account.
You could also see current tax benefits from your employer plan contributions. The contributions are deducted pretax from your check. That means your contributions reduce your taxable income, thus reducing the amount of taxes you ultimately pay.
Your employer may also make matching contributions on your behalf to the employer-sponsored plan. For instance, many employers will match employee contributions dollar-for-dollar up to a certain threshold, like 3 percent of salary. If you haven’t done so in the past, consider increasing your contribution so you can take advantage of the full employer match.
In 2018 you can contribute as much as $18,500 to your 401(k) plan. If you’re age 50 or older you can also contribute an extra $6,000 in catch-up contributions, bringing your total allowable contribution to $24,500.1
While your 401(k) or other employer plan may be your primary savings vehicle, you can also use an IRA to save for retirement. An IRA is an individual account that offers tax-deferred growth specifically for retirement savings. If you don’t have an IRA, you can open one through a financial professional, who can also help you develop and implement a strategy that aligns with your needs and goals.
There are various types of IRAs, but the traditional is the most widely held. From a tax standpoint, it’s treated similarly to a 401(k). Your contributions may be tax-deductible, and your funds grow tax-deferred inside the account. All distributions are taxed as income.
Remember, IRA funds are meant for retirement. If you take a distribution from the account before the designated age—59½—you could face a 10 percent early withdrawal penalty. There are exceptions to this policy for things like disability and financial hardship. However, most early withdrawals are subject to the penalty in addition to income taxes.
In 2018 you can contribute $5,500 to an IRA. If you’re age 50 or older you can contribute an additional $1,000 in catch-up contributions, giving you a total allowable contribution of $6,500.2
The traditional IRA may be the most widely held, but the Roth IRA has gained in popularity in recent years. It’s a popular option because of its unique tax treatment.
Unlike the traditional IRA and 401(k), Roth contributions are made with after-tax dollars. This means you can’t deduct your contributions. Your funds still grow on a tax-deferred basis inside the account. Distributions from the account are tax-free assuming you’re age 59½ or older. You can use the Roth to create a stream of tax-free retirement income.
Ready to implement your retirement savings strategy? Let’s talk about it. Contact us today at Benefit Resource Partners. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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