The best way to have a comfortable retirement is to start saving and investing as early as possible. But what type of account should you use for your retirement savings?
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Many different options can help you prepare for retirement. However, not all retirement accounts are the best solution for every person.
Read on to learn about five different accounts that can help you prepare for a wealthy retirement. Remember, it’s up to you to choose the ones that best fit your needs, situation, and goals.
Traditional 401(k)
A 401(k) is a retirement plan offered by your employer that gives you the opportunity to contribute money pre-tax, which can result in significant savings.
Some employers will match your 401(k) contributions before taxes up to a certain amount or percentage of your paycheck. If your employer offers a 401(k) match, you should take full advantage of this opportunity, as it is essentially free money offered by employers. If you are unsure whether your company offers a match, contact your employer’s human resources department.
The maximum contribution to a 401(k) plan in 2024 is $23,000 for employee contributions and $69,000 for combined employee and employer contributions.
Traditional IRA
Any worker who has taxable income can open a traditional individual retirement account (IRA). Contributions you make to a traditional IRA are typically tax-deductible, and you can invest your IRA contributions in a variety of different assets, such as mutual funds or ETFs.
Investment earnings from a traditional IRA are tax-free. Once you begin making withdrawals from your traditional IRA after age 59½, your IRA distributions are taxed as ordinary income.
The maximum contribution to a traditional IRA is $7,000 in 2024. Individuals age 50 and older can contribute up to $8,000.
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RothIRAs
A Roth IRA is another great retirement account option for people who qualify. Your contributions aren’t tax-deductible, but you can withdraw the money tax-free in retirement. Plus, you don’t have to take minimum distributions each year.
In 2024, single taxpayers earning $160,000 or less or jointly filing taxpayers earning less than $240,000 can contribute directly to a Roth IRA. If your income exceeds these amounts, you must invest in a traditional IRA instead. The contribution limits are the same for a Roth IRA as they are for a traditional IRA.
“Individuals who have saved in Roths during their working years benefit from paying taxes at the time of contribution and being able to let those assets grow tax-free for the rest of their lives,” said Marissa Beyer, certified financial planner (CFP) and senior wealth advisor and partner at Fidato Wealth.
“In addition, some people will be in a higher tax bracket when they retire. For this group of people, saving in a Roth IRA and paying taxes while working (at a lower income tax rate) means building a retirement pot of money from which they can make withdrawals without paying income taxes.”
Spousal IRA
A spousal IRA is not technically a different type of retirement account. Rather, a spousal IRA occurs when a working spouse contributes to an IRA on behalf of a non-working spouse who has no or very little income of his or her own. The spousal IRA is an exception to the requirement that a person must have earned the income to contribute to an IRA.
To qualify, the working spouse’s income must be equal to or greater than the total IRA contributions made on behalf of both spouses. With a spousal IRA, each IRA is set up in the individual’s name. Spousal IRAs can be Roth IRAs or traditional IRAs.
Spousal IRAs are subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs.
Non-qualified account
Most people use special retirement accounts when saving for retirement. Using a standard, non-qualified investment account also has advantages, but it depends on your income and tax situation.
“An account that is not specifically designated for retirement savings (i.e., one that is earmarked for retirement savings) is ideal for retirement because the money in such an account is taxed very differently than in an IRA,” Beyer said.
“Even if you pay taxes annually on interest and dividends from a non-qualified account, any gains accruing in the account (assuming the investment is held for more than one year) are taxed at the long-term capital gains tax rate, which is typically lower than the normal tax rate for individuals or couples.”
Beyer continued, “A non-qualified account (as opposed to a pure IRA) allows an individual/couple more control over their tax situation and ultimately allows for higher spending in retirement because not all assets are taxed the same.”
The conclusion
These are just a few of the accounts that can help you prepare for a wealthy retirement. There are even more retirement account options, such as 403(b)s for public school or nonprofit employees, savings plans for federal employees, 457(b)s for state or local government employees, and even options for small business owners or freelancers (such as SIMPLE IRAs, SEP IRAs, Payroll Deduction IRAs, or Solo 401(k)s).
Remember, with all these options, it’s all about finding one or more that work best for your situation and using them regularly.
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This article originally appeared on GOBankingRates.com: 5 Accounts to Help You Prepare for a Wealthy Retirement
