Saving for retirement does not involve a one-size-fits-all plan. Since every situation is unique, it is important to look for the retirement account that best lines up with your personal job situation and future goals. Determining which type of account(s) you should use to save for retirement can be tricky, especially when there are many for you to choose from. Here is a brief look at five of the most popular retirement accounts and how to make the most of these long-term saving tools.
401(k) that is offered by your employer
For the average person, this type of plan will be the easiest and most convenient place to start investing for retirement. A 401(k) account is offered through employers, so you will need to check if this plan is available at your workplace. Even part-time workers are eligible for this plan, but there can be some stipulations so again check with your employer. In 2020, the IRS allows you to contribute up to $19,500 to a 401(k) if you are under 50 years old. If you are age 50 or older, you can put up to $26,000 in the account. You will need to start taking withdrawals from the account starting at age 70 ½ but no earlier than 59 ½.
Also known as a one-participant 401(k) plan, a solo 401(k) is designed for an individual business owner without any workers. This account is similar to the 401(k) listed above but only includes self-employed or business owners with no other full-time employees. However, the individual claiming a solo 401(k) cannot be employed by any other business owned by them or their spouse. You can even contribute as both an employer and employee with this plan. In 2020 the IRS allowed contributions of up to $57,000 a year. If you are 50 or older, you can also make catch-up contributions of up to $6,500, which does not include the total contribution. This means your maximum contribution limit is $63,500 for this plan! Total contributions will depend on your net business income, though.
Individual Retirement Account (IRA)
An individual retirement account is only available to those with earned income. If you earn $2,000, you will be able to put up to $2,000 into the account. You can contribute up to $5,500 a year to an IRA. $6,500 if you are 50 or older. You can contribute to both an IRA and a 401(k). However, if you have a retirement plan at work, this plan will change your taxable income. You cannot deduct your IRA contributions from your taxable income if you earn more than $73,000 annually for singles or $121,000 for married couples. This account is best to begin investing in early if you are financially able to do so.
Health Savings Account (HSA)
A Health Savings Account can be used to build funds to help cover health costs in retirement. To be eligible for an HSA, you need to have a high-deductible health insurance plan. The 2021 contribution limits have already been released. They are $3,550 for an individual and $7,100 for a family. If you are 55 or older, you can make an additional $1,000 contribution per year. The money can be used at any time for allowable medical expenses.
Like an IRA, you need earning income to be eligible for a Roth IRA, and the amount contributed cannot be more than the amount you earn. You can set aside up to $6,000 in 2020, or $7,000 if you are age 50 or older. The Roth IRA’s biggest benefit is the money will come out tax-free after you reach the age of 59 ½. Unlike the aforementioned retirement account, a Roth IRA does not have the required minimum distributions. So, you will not be forced to remove the money when you turn 70½. It is important to read about the many different accounts you can use to ensure you have picked the one that is right for you. Your future is in your hands, and you have what it takes to make your retirement something to look forward to. To read more about different retirement accounts, check out Forbes. Here at RITA, we are dedicated to the expansion of opportunities for all Americans to save and invest for retirement. We want to give you the opportunity to feel informed, confident, and prepared for the future. Contact us today for more information on retirement plans that are right for you.