Have you started saving for retirement? If you haven’t yet, don’t worry about it, because it’s never too late. In general, financial experts from all over recommend you save at the very least 10 percet of your annual income for each year of your retirement. So if you plan to retire by the age of 60, now is the time to start saving. With a retirement savings account, you can save up the money you need for retirement and preserve your quality of life after you stop working. When it comes to retirement accounts, you may be surprised to find out there are actually several different kinds. If that sounds overwhelming, check out these frequently asked questions that should help break things down for you.
A simple IRA is much like a regular IRA but involves less work in setting it up. For the most part, there’s a lot less paperwork involved. These are set up by employers, requiring employers to match employee contributions to their IRA. With this type of IRA, employees are allowed to contribute nearly twice as much as a regular IRA. Simple IRAs are similar in many ways to a 401k.
A SEP IRA is an individual retirement account for self-employed people. It allows you to contribute a portion of your income into a retirement account of your own. The portion that you contribute can then be deducted from your income taxes.
A Roth IRA is a popular type of IRA that allows for more flexibility. With a ROTH IRA contributions, however, are made after taxes. You may recall that we mentioned earlier how early withdrawal from an IRA could mean being taxed and penalized. This is not the case with a ROTH IRA. By the age of 59 ½ you can start withdrawing without being taxed. Additionally, you don’t have to withdraw your money by the age of 70.
A 401k is a retirement savings account started up by your employer. Money from your paycheck is deducted during payroll and before taxes. With a 401k you can save up to $18,000 (as of 2015) per year, or $24,000 if you are 50 or older, before your income is taxed. When you leave your job, you can put the savings into your new employers 401k or you can put it into another account called an IRA. A 403b is like a 401k but for non-profit employees.
You can start up your own 401k for your business for yourself and for your employees if you want. This can be a great incentive for getting people to work for you. You can save up to around $60,000 each year.
Don’t worry about sacrificing your current quality of life for life during retirement. Contributing a little at a time for each paycheck will certainly be enough. You’ll likely be working longer than you live in retirement so saving that much and that far in the future doesn’t make sense. And if you can’t contribute anything every now and then, don’t worry about it. But just make sure you save at least 70% for every year of retirement so you don’t have to worry about money in the future.
A health savings account is a type of retirement savings account where, if you have a high-deductible on your health plan, you can use the health savings account to save money on inevitable health costs in the future. Over $3,000 may be saved for yourself, or over twice as much if you have a family. You can contribute even more if you are over 55 years old. This money can be used for any medical expenses and if you don’t use it, then it always rolls over. When you’ve reached the age of 65, you can withdraw from the account for any reason at all, but you may have to pay taxes on it as if it were income.
An IRA is another type of retirement savings account that you can put your money in and watch it grow. Contributions to an IRA are made before taxes and you can contribute up to $5,500 per year or $6,500 if you are over 50. You may however be taxed on your income if you try to withdraw money from your IRA early, plus face a penalty. It should also be noted that you must withdraw by the age of 70.