1. Contribute to an employer-sponsored retirement plan up to the employer's match
- If you have an employer that matches retirement fund contributions, max out your employer's match within a retirement plan
- For example, my employer contributes 50% for the first 6% that I contribute. That basically means, if I contribute 6% of my salary to a retirement plan, the max that my employer will match will be 50% of that. So if I made $50,000 and I contribute $3,000 (which is 6% of $50,000) of my salary to a retirement plan, my company would match $1500 (which is 50% of the 6% that I contributed).
- This is basically free money
- Generally, a Roth retirement plan is ideal for most people since you can allow your money to grow tax free.
- However, a traditional retirement plan may be ideal for someone who expects to be in a lower tax bracket when they withdraw the funds from their retirement account since with a traditional retirement plan, you'll have to pay taxes on the funds at the time of withdrawal.
- Some employer matches are vested. This means you receiving the full employer match is contingent upon how long you stay with the company. For example, I worked for an employer that vested 33% for the first year of my employment, 67% for the second year of my employment and 100% for the third year of my employment. This means that if parted from my job after the second year of my employment, then I would only receive 67% of the company match that I qualified for.
- And remember than any money that you contribute to an employer-sponsored retirement plan is always 100% yours.
2. if you qualify, max out an HSA
- An HSA stands for a Health Savings Account.
- Because they are tax free upon contribution and withdrawals if used for medical expenses.
- If you don't use all the funds contributed to an HSA, your HSA turns into a traditional IRA once you turn 65.
- In 2020, the maximum contribution that an individual with self coverage can make is $3550 and the maximum contribution that an individual with family coverage can make is $7100.
- To see if you qualify for an HSA, you can go to healthcare.gov to find a financial institution that provides HSAs and works for you.
3. max out a traditional or roth IRA
- A roth or traditional IRA is a little more restrictive than an HSA but still has some great tax benefits if utilized correctly
- IRA stands for individual retirement account.
- in a traditional ira, contributions are withheld from taxes but withdrawals are taxed.
- in a roth ira, contributions are taxes but withdrawals are tax free.
- Similar as with a traditional or Roth employer-sponsored retirement plan, choosing between a traditional or roth IRA depends a lot on your financial situation.
- If you're expecting to be in a lowerr tax bracket when you retire, a traditional IRA may be more tax beneficial.
- IRAs can be set up through a financial institution like fidelity or vanguard.
- Anyone can contribute to an IRA as long as they contribute with earned income (i.e. any money that you earn from a job).
- To utilize an IRA correctly, you have to invest money WITHIN the IRA.
- Imagine that you have a mason jar of stocks, the mason jar is representative of an IRA that just holds the stocks.
- Investing within IRA is just the account in which you invest within which provides tax advantages for retirement savings.
4. go back to the retirement fund and max that out
- Whether you're contributing to a traditional or after tax employer sponsored retirement account, you'll get the tax benefits of either deferring taxes for a traditional account or tax free growth for a roth account.
5. contribute to a brokerage account
- A brokerage account doesn't offer any tax benefits since the funds you contribute are after tax funds and the funds you withdraw are subject to capital gains taxes
- Money within a brokerage account is ideal for any money that you don't want any restrictions around.
- As with all the options I talked about in this video, there are restrictions around withdrawing money early for any reasons that are not allowed by the IRS.
- funds in an HSA withdrawn before 59 1/2 must be used for qualified health expenses.
- and there are similar early withdrawal restrictions for IRAs and employer-sponsored retirement plans
- But funds within a brokerage account are not subject to withdrawal restrictions.
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