Is this the year you’re going to make the most of your retirement savings?
At T. Rowe Price, we recommend you try to save at least 15% of your income (including any 401(k) company match) each year for retirement. That’s because you may need to rely on your retirement savings, combined with Social Security benefits, to fund a retirement that could last decades. Some of us may be able to save 15% of our income now. Others may need to take incremental steps to get there. That’s okay. Being intentional about saving, and setting a course to get on track, is a great first step.
Depending on your circumstances, here are eight retirement accounts to consider:
Start with your 401(k) plan at work
If you can increase your savings rate right away, that’s ideal. But if not, you can also get there by increasing the rate gradually over time. Consider starting to save 6% of your salary – and make sure you’re taking advantage of the full company match if available. Many company plans will automatically increase your contribution amount each year, so make sure to enroll in this service. In 2020, you can set aside up to $19,500 if you are under age 50 and $26,000 if you will be age 50 or older.
Self-employed? Consider saving in a simplified employee pension plan IRA (SEP-IRA)
This type of IRA is easy to set up and maintain, and it has very generous contribution limits. For 2019, you can contribute the lesser of $56,000 or 25% of your net self-employment earnings and $57,000 for 2020. Your contribution may be tax-deductible and unlike traditional and Roth IRAs, you can contribute to your SEP IRA for 2019 up until the 2019 extended tax deadline and lower your taxable income for 2019. Keep in mind, a Roth option is not available with a SEP-IRA.
Have a side job? You can participate in both a 401(k) plan at your workplace and a-SEP-IRA for your second job.
Open or fund an individual retirement account (IRA)
If you don’t have access to a workplace plan or would like to supplement your savings, consider a traditional IRA. You can contribute up to $6,000 ($7,000 if you are age 50 or older) to an IRA in 2019 and 2020. The good news – you have until April 15, 2020 to make your contribution for 2019 and possibly get a tax deduction for your contribution. You’ll want to take advantage of the tax deductibility of your contribution, if eligible, but your deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.
Consider a Roth option
While a Roth option doesn’t provide you an immediate tax benefit, it does provide potentially tax-free income in retirement. With the unpredictability of future tax rates, it may be beneficial to have a mix of accounts with different tax treatments. You can make Roth contributions in two ways:
- Through a Roth IRA: The same contribution limits mentioned above apply; however, the ability to contribute is phased out if your income exceeds certain levels.
- Through a 401(k) or 403(b) plan: You may be able to direct contributions to a designated Roth account if your workplace plan offers this option. In this case, contributions are not limited by your income level.
See if your spouse is eligible for a Spousal IRA
If your spouse doesn’t have their own earned income (or very little), they can fund their own IRA based on your compensation if you file a joint income tax return. The IRA can be either Traditional or Roth, and the same contribution limits apply. However, your combined IRA contributions can’t exceed your combined income, and combined contributions to your IRA and your spouses’ IRA can be a total of up to $12,000 ($14,000 if both 50 and over) or $6,000 ($7,000 if 50 or over) to each IRA.
Explore a Rollover IRA
Since cashing out your employer plan may result in paying taxes and a penalty, you have three options that keep your money tax-deferred when you change jobs. You can leave it with your previous employer (if permitted), roll it into your new 401(k) plan (if permitted) or roll it into an IRA. If you’ve changed jobs several times and wish to consolidate all your balances in a single account, a Rollover IRA may be a good option.* It’s best to do a direct rollover (meaning you never receive a check) so that the money transfers directly from one institution to the other.
Fund a Health Savings Account (HSA)
You may be wondering, “What does an HSA have to do with retirement?” This account provides triple tax advantages. Your contributions may be tax-deductible, your money can grow tax-deferred, and when you withdraw the money (for qualified health care expenses), you do so tax-free. If you participate in a high-deductible health care plan (HDHP), you can contribute $3,500 for individual coverage or $7,000 for family coverage in 2019. For 2020, you can contribute $3,550 for individual coverage and $7,100 for family coverage. Many people use HSAs to cover immediate, out-of-pocket health care costs. But they are also a good way to invest tax-free for the long term to offset future health expenses in retirement.
Invest in a taxable nonretirement account
While it’s important to utilize the tax advantages of the accounts listed above, you may want to build up savings that are more accessible to give you financial flexibility like money on the side for emergencies. You could also supplement your retirement savings with investments for the longer term, especially if you may not benefit from the tax deductibility of IRA contributions. A combination of taxable, tax-deferred and tax-free sources of savings might just be the recipe for retirement success. Reassessing your options regularly and weighing the benefits and risks of each will help you craft a plan to make the most of your investments.
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When deciding between an employer-sponsored plan and an IRA, there may be important differences to consider – such as range of investment options, fees and expenses, availability of services and distribution rules (including differences in applicable taxes and penalties). Depending on your plan’s investment options, in some cases, the investment management fees associated with your plan’s investment options may be lower than similar investment options offered outside the plan.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used and cannot be used for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing or recommending to any other party any transaction or matter addressed herein.
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