Suppose you already know your retirement savings options; congratulations! You’re on your way to a more financially secure retirement. You must continue to save and determine other retirement savings vehicle strategies that may be appropriate for your situation.
This article provides relevant information on five different retirement savings plans to help you understand which may be suitable and additional options to help you save for retirement.
1. Defined contribution plans
These allow an executive to delay part of their income until the future, reducing their taxable income now. Deferred comp plans are limited to executives and not all employees. Deferred comp plans also defer taxes on compensation until the executive accesses it later. If the executive leaves the company, the deferred comp plan can transfer into another tax-advantaged retirement savings account. The deferred comp agreement between the executive and their employer generally outlines:
- The amount of income to be deferred may include a portion of salary, bonuses, or other eligible cash payments.
- The deferral period schedule when the executive will take the income and the timeline until it depletes.
- The initial investment including the deferred income and any growth earned. The deferred payment is not placed into an investment strategy but designated for accounting purposes into a portion of the company.
2. Roth IRAs
Roth IRAs fund with after-tax contributions, so you pay taxes upfront. When you take distributions, both the contribution and accumulation are tax-free. Contributions are withdrawn tax and penalty-free for emergencies, home purchases, and more. However, drawing the account’s accumulation before age 59 1/2 will result in a 10% IRS penalty.
Anyone can open a Roth IRA at any age, as long as they have income. But income limits apply for who is eligible to contribute generally vary yearly. Reach out to your financial and tax professionals to determine if you are eligible to contribute and the contribution limits for this year.
These fund with pre-tax contributions, which grow tax-deferred. IRA contributions and accumulation are taxed at the owner’s tax rate and are penalty-free if taken after age 59 1/2 when taken as distributions. If distributions occur before age 59 1/2, they tax as ordinary income, and an early distribution penalty of 10% may apply Here are a few more things to know about Traditional IRAs:
- Traditional IRAs have no income limits to contribute
- If you’re eligible for the tax deduction on your contributions, you can claim it whether or not you itemize deductions on your tax return.
- If you participate in your employer’s retirement savings plan, you may not be eligible to contribute to a traditional IRA.
4. A 401(k)
This is a tax-deferred retirement savings plan offered by employers that fund with pre-tax contributions, which grow tax-free. Distributions are taxed at the owner’s tax rate and are penalty-free unless the owner is under age 59 1/2 and will also take an early distribution penalty of 10%.
There is no income limit to participate in a 401(k), but there is a yearly contribution limit. Your financial professional can help you understand your contribution limits and if your 401(k) strategies are appropriate for your risk tolerance, timeline, and goals.
5. Fixed-indexed annuities
FIAs are contracts purchased directly from an insurance company or a financial institution. Annuities are bought with a one-time or series of payments over time. A feature of annuities is that they provide income for life and protect against market risk.
All annuities offer tax efficiency while they grow; they lock in gains based on market performance. However, the annuity protects the accumulation and initial investment when the market declines. Another benefit of annuities is that they provide a guaranteed death benefit of the initial investment and can include survivor benefits as a rider for an additional cost.
An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information.
Now that you know five common types of retirement savings options, a financial professional can help you determine which are appropriate for your situation and align with your retirement savings goals.
SWG 2306340-0822a The sources used to prepare this material are believed to be true, accurate and reliable, but are not guaranteed. This information is provided as general information and is not intended to be specific financial or tax guidance. When you access a link you are leaving our website and assume total responsibility for your use of the website you are linking to. We make no representation as to the completeness or accuracy of information provided at this website. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information and programs made available through this website.
In addition, Peak American specializes in providing strategies and guidance for those who are seeking a better lifestyle in retirement. If you have retirement savings of five million dollars or $50,000, we can ensure it works as hard. As a result, we offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!