Choosing the best retirement account requires foreknowledge about what retirement will look like for you and what you can contribute right now. While the future may be hard to divine in todays faster than light changing world, it is important to make the best plans with the information now available. Failing to plan could end up putting you in a difficult situation in the future.
The first question to ask is “will you be in a higher tax bracket when you retire than what you are in right now?” If you will not be in a higher income tax bracket, than opening up and contributing to a Traditional IRA is one of the best choices available to you. A Traditional IRA is tax deferred meaning that you will pay taxes on it when you remove the money from the account not when you actually earn the money. This means that you can take the total of your contributions for the year out of your income taxes. This is the main difference between a Traditional IRA and a Roth IRA.
The maximum contribution that can be made in any one year to an IRA is $5000 with an upgrade to %6000 for those who are over the age of 50 and are attempting to catch up. No one can deposit more than his or her taxable income for the year.
For those who can contribute more to their retirement, a 401(k) or 403(b) for the nonprofit world may make the best sense. The cap for contributions for these types of accounts is set at $49000 and $54500 for those older than 50. While these plans may be complicated, they are often set up through a company who may match funds up to a point put into the account. This type of retirement match should not be missed by anyone. If an employer says that they will match up to 4 percent of the person’s pay, that person should put in at least 4 percent of his or her pay. It’s like getting a 4 percent raise, and free money is nothing to sneeze at.
While there are several other types of retirement accounts, these are the most popular and can fit almost everyone’s needs. Small business owners should look into Simplified Employee Pensions (SEPs) for their retirement needs. SEPs are generally easy to set up and cost very little in administrative fees.
Save for the Future
Retirement is closer than you think! It is always important to start thinking about your retirement and to start saving money. Many people use savings accounts to help them prepare for retirement as they are a great addition to a 401k or other retirement accounts. A savings account will allow you to have money set aside for emergency needs and they are a great option to safeguard yourself from financial problems. There are many different savings account options that you can look into:
- Traditional savings account
- Certificate of deposit
- Money market account
- High interest savings account
Compare interest rates on the various accounts along with the initial deposit requirements in order to select the best account for your situation. Planning for retirement is one of the most important things you can ever do and it pays to prepare when you are young as you have plenty of years to work on saving so you can retire happily!