RETIREMENT! As a millennial, we think we're invincible and that we're going to live forever and that retirement is far far away, there's no way I need to think about that now. Saving for retirement can be confusing and daunting. But it doesn't have to be! I'm here to share with you the main retirement savings accounts you can use to start saving for retirement! I will make another post soon about how to start investing within your retirement account also!*
401k/403b:
A 401k and a 403b are both retirement savings accounts which are offered by your employer. The 401k and the 403b do similar things in terms of retirement savings. The difference being that for one to qualify for a 403b, you must be considered "certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers" as the IRS stated. Other companies that offer 401k plans are for-profit organizations.
When you contribute to this type of account, the money is withheld pre-tax before you receive your paycheck. This option is probably the easiest and smartest ways to first save for retirement. This is because, often times, your employer will match your contribution to your 401k or 403b up to a certain percent. That's free money! At the moment of me writing this, you can save up to $19,000 of your pretax income ($25,000 if you're 50+). This doesn't include your employer's match. So let's say you are 45 years old, your employer will match up to 5% and your pre-tax income is $100,000. If you contribute $18,000, your employer will match 5% (or $5,000) for a total of $23,000 going into your 401k or 403b. If we follow the same conditions and you contribute $3,000, your employer will match 3% (or $3,000) for a total of $6,000 going into your 401k or 403b.
If you leave your job, you can roll over your 401k/403b into a new employer's 401k or your own IRA.
Traditional IRA:
Anyone who has earned income can contribute a maximum of $6,000 to a Traditional IRA ($7,000 if you're 50+). The money grows tax-free. The difference between a Traditional IRA and a Roth IRA is that a traditional IRA is contributed with pre-tax income. When you take the money out, you will have to pay taxes then. This option is good for those who believe when they take the money out, they will be at a lower tax bracket than at the time they contribute it. You can contribute to both a 401(k)/403(b) and a Traditional IRA but you cannot deduct your IRA contributions from your taxable income if you earn more than $73,000 (single) or $121,000 (married filing jointly). And after earning $63,000 and $101,000, respectively, you only get a partial deduction.
Roth IRA:
Anyone who has earned income can contribute a maximum of $6,000 to a Roth IRA ($7,000 if you're 50+) if you make less than $120,000 (single) and $189,000 (married filing jointly). If your income is more than $120,000 (single) or $189,000 (married filing jointly), your allowed contribution is reduced. If your income is more than $135,000 (single) or $199,000 (married filing jointly) then you do not qualify to contribute to a Roth IRA.
The money you earn grows tax-free and you pay no taxes on withdrawals after 59 1/2 years old. You are allowed to contribute to both a Roth IRA and a Traditional IRA but the contribution limit applies to your total contribution ($6,000, $7,000 for 50+). A Roth IRA is AMAZING because since you contribute to it with after-tax dollars, you don't pay taxes when you take the money out. This is especially great for those who think they'll be at a higher tax bracket when they retire than they are at right now.
Health Savings Accounts
A Health Savings Account (HSA) works in conjunction with high deductible health insurance policies. The IRS defines a "high deductible health insurance plan" as a health plan with an annual deductible that is greater than $1,350 (single) or $2,700 (family) and the annual out-of-pocket expenses (deductibles, co-payments, etc.) do not exceed $6,750 (single) or $13,500 (family.
You can contribute pre-tax up to $3,500 (single) and $7,000 (for a family), and if you're 55+, you can contribute an additional $1,000. You can withdraw money from an HSA to pay for medical expenses. If you don't spend all the money annually the money rolls over indefinitely. Once you're 65, you can withdraw the money for any reason without penalty, but you have to pay income taxes on the money you withdraw. Or you can still use it for medical expenses. If you withdraw the money for nonmedical expenses before age 65, you'll have to pay income tax on it plus 20%. One great thing about this option is that you can invest the money you contribute if you don't need the money for medical expenses as you would in other retirement accounts!
*UPDATED as of January 16, 2019*
Anyone who has earned income can contribute a maximum of $6,000 to a Traditional IRA ($7,000 if you're 50+). The money grows tax-free. The difference between a Traditional IRA and a Roth IRA is that a traditional IRA is contributed with pre-tax income. When you take the money out, you will have to pay taxes then. This option is good for those who believe when they take the money out, they will be at a lower tax bracket than at the time they contribute it. You can contribute to both a 401(k)/403(b) and a Traditional IRA but you cannot deduct your IRA contributions from your taxable income if you earn more than $73,000 (single) or $121,000 (married filing jointly). And after earning $63,000 and $101,000, respectively, you only get a partial deduction.
Roth IRA:
Anyone who has earned income can contribute a maximum of $6,000 to a Roth IRA ($7,000 if you're 50+) if you make less than $120,000 (single) and $189,000 (married filing jointly). If your income is more than $120,000 (single) or $189,000 (married filing jointly), your allowed contribution is reduced. If your income is more than $135,000 (single) or $199,000 (married filing jointly) then you do not qualify to contribute to a Roth IRA.
The money you earn grows tax-free and you pay no taxes on withdrawals after 59 1/2 years old. You are allowed to contribute to both a Roth IRA and a Traditional IRA but the contribution limit applies to your total contribution ($6,000, $7,000 for 50+). A Roth IRA is AMAZING because since you contribute to it with after-tax dollars, you don't pay taxes when you take the money out. This is especially great for those who think they'll be at a higher tax bracket when they retire than they are at right now.
Health Savings Accounts
A Health Savings Account (HSA) works in conjunction with high deductible health insurance policies. The IRS defines a "high deductible health insurance plan" as a health plan with an annual deductible that is greater than $1,350 (single) or $2,700 (family) and the annual out-of-pocket expenses (deductibles, co-payments, etc.) do not exceed $6,750 (single) or $13,500 (family.
You can contribute pre-tax up to $3,500 (single) and $7,000 (for a family), and if you're 55+, you can contribute an additional $1,000. You can withdraw money from an HSA to pay for medical expenses. If you don't spend all the money annually the money rolls over indefinitely. Once you're 65, you can withdraw the money for any reason without penalty, but you have to pay income taxes on the money you withdraw. Or you can still use it for medical expenses. If you withdraw the money for nonmedical expenses before age 65, you'll have to pay income tax on it plus 20%. One great thing about this option is that you can invest the money you contribute if you don't need the money for medical expenses as you would in other retirement accounts!
*UPDATED as of January 16, 2019*
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