Financial security is essential at any age, however, once someone reaches retirement age, having that extra layer of security is a must. For this reason, it’s important that saving starts at a younger age with the right type of retirement account.
Read on to learn about four of the most common retirement accounts and how they can maximize savings.
A traditional IRA is the most common type of retirement account people usually choose. What it entails is it allows someone to save money that is tax-deferred. Tax-deferred basically means untouched by taxes. People can continue to put money in this account for as long as they wish, even up until the day they retire. It is only when the money is withdrawn from the account that taxes are applied and the remaining funds are able to be withdrawn.
However, there is a limit to how much someone can put into an IRA. This limitation is dependent on a person’s age. For example, anyone under 50 years old is only eligible to save up to $6,000 in total. But if someone is 50 or older, they can save up to $7,000 in total.
Pension plans work differently than an individual retirement account. Instead of a person opening the account themselves, it is done by their employer. This is similar to a 401k plan except that the employer contributes the money as where a 401k has the employee do it. However, there is one major difference between a pension plan and a 401k; the latter does not guarantee the employer will contribute. Pension plans always guarantee the employee a month’s pay.
A Roth IRA, or individual retirement account, ais considered one of the best retirement accounts you can open. One thing to remember is that a person may only have savings if their income is higher than their tax rate.
According to the experts at SoFi Invest,”You will contribute with after-tax money, which means you will not receive an income tax deduction for contributions. Your balance will grow tax-free and will be able to withdraw the money tax-free in retirement.” It’s important to consider all aspects of this type of account prior investing.
A spousal retirement account is akin to a traditional or Roth IRA. It lets a person add tax-deferred funds into an account and builds it up over time. However, instead of investing into the account for themselves, it is for their unemployed spouse. The rules and limitations of a traditional or Roth IRA still apply meaning you can only add so much before being cut off. But if the spouse is old enough, they are eligible for a limit increase.
Opening a retirement account takes forethought and planning. Weigh the pros and cons of each type and take the time to learn about the different benefits retirement accounts offer. If in doubt, reach out to a financial professional who can explain the differences prior to making a final decision.