How to choose the right retirement savings plan

While Americans know they need to save for retirement, many are still missing.

More than half of American workers aged 40 to 73 have less than $ 50,000 set aside for their golden years, according to a survey by the Insured Retirement Institute. Almost 6 in 10 save less than 10% of their income.

In order to actually stop working, you will need to make sure you put enough aside. The general rule of thumb is around 15% of your income, although if you can’t save that much, a little bit helps.

There are different ways to save, depending on your situation. An employer-sponsored plan, such as a 401 (k) plan, or an individual retirement account – whether traditional or Roth – are the most popular options.

They have different rules, although each offers some form of tax benefit.

Here are the factors to consider in determining the best option for your situation.

Contributions to a traditional pension plan sponsored by your employer, usually a 401 (k), are automatically deducted from your paycheck, before tax. This reduces your taxable income each year. Instead, tax is levied when you withdraw the funds at retirement. The rate will therefore depend on your tax bracket at that time.

The big advantage of 401 (k) is that you can save up to $ 19,500 for 2021 regardless of your income, said personal finance expert Chris Hogan, author of “Retire Inspired” and “Everyday Millionaires” .

With IRAs, you can only contribute $ 6,000 this year. If you are 50 or older, you can save an additional $ 6,500 in your 401 (k) this year or an additional $ 1,000 in your IRA.

Your company may also offer a Roth 401 (k), which means contributions are made after tax and you will not be taken from retirement withdrawals.

Hogan prefers the Roth 401 (k).

“This saves nearly $ 20,000 tax-free each year,” said Hogan, who is also affiliated with financial education and media company Ramsey Solutions and hosts an online show, “The Chris Hogan Show”.

In fact, a Roth 401 (k) essentially lets you put more money aside than a traditional plan, said Pete Hunt, certified financial planner and director of client services at Charlotte-based Exencial Wealth Advisors, in North Carolina.

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Hunt said that $ 19,500 (or $ 26,000 if over 50) of after-tax money “is much more valuable than the same amount of pre-tax money, especially over many years.”

If your employer matches a certain percentage of your 401 (k) contributions, at least try to contribute until it matches, advisers say. Business money will be added before tax whether or not your contributions are taxed.

When you reach age 72, you should start collecting a minimum annual required distribution, or RMD, from your 401 (k).

Roth IRA contributions are also made after-tax, so you don’t have to pay tax when you withdraw money in retirement.

However, there are income limits. You can contribute up to $ 6,000 (or $ 7,000 if you are 50 and over) if you earn less than $ 198,000, are married and file jointly, or less than $ 125,000 if you are single. You can contribute a reduced amount if you earn between $ 198,000 and $ 208,000 and are married or between $ 125,000 and $ 140,000 if you are single.

Experts advise setting up a Roth IRA when you are young because you might not qualify when you are older and earn more money.

You may also see higher tax rates in the future.

“I recommend it to all of my clients, unless they’re in a situation where they think they’ll earn a lot less in the future,” Hunt said.

There is also no RMD with Roth IRAs and you can withdraw your contributions at any time without taxes or penalties. As a general rule, you cannot earn any income until you are 59 and a half years old. You also usually have more investment options than you have in a 401 (k).

It also doesn’t have to be a situation of one or the other. If you have a 401 (k) but also qualify for a Roth IRA, do both, Hunt said.

First, contribute up to the employer’s 401 (k). He then recommends putting money into a health savings account, if you have a high deductible health care plan. After that, put the money in a Roth, which has more flexibility, he said.