While it can be thrilling to imagine your retirement, many find building your nest egg overwhelming.
There are many retirement plans available. There are many retirement plans available. A long-term financial plan is the best way to feel confident in your retirement savings. You should also have a fiduciary financial professional on your team.
This article will provide a guide on the most popular retirement account types, their workings, and the best people to use them.
It is difficult to choose the best savings vehicle. When you're planning your retirement, there are many factors to consider: your age, your income and the ideal tax-optimization strategy. These are common retirement plans and criteria that you should consider.
Tip: Use our free personal finance tools to help you plan your retirement. Personal Capital's Retirement Planner is a good place to begin. It will help you evaluate your retirement readiness and pinpoint areas that need improvement.
1. Traditional 401k
The 401k is one of the most well-known and popular investment tools. It's an employer-sponsored retirement plan that allows you to save tax-free for retirement.
Continue reading What's a 401k, anyway? – A Comprehensive Guide
Traditional 401k contributions are made using pretax dollars. This reduces your taxable income, and allows your contributions to grow tax-deferred up until retirement.
The contribution limit for 2022 is $20,500 (222,500 in 2023), while individuals 50 years and older may contribute an additional $6,500 (7,500 in 2023).
Employers might offer a profit sharing or employer match program, where they contribute a percentage to your 401k plan. Employers may have different vesting requirements. For example, if you are employed for a specific number of years, employers can use that. Contributions made by your employer can be 100% vested immediately. This means that you have full control of the money once it has been applied to your 401k account. To receive the match benefit from your employer, your employer may require that a percentage or a certain amount of your salary be contributed to your401k. You should contribute at least that amount.
To avoid penalties when withdrawing contributions from your retirement plan, consult your financial advisor. Withdrawals from 401ks made before the age of 59 1/2 are subject to a 10% penalty and ordinary income taxes, which are taxed at your highest marginal rate. There are some IRS exceptions to the early withdrawal penalty. However, withdrawing money from your 401k before the age of 59 1/2 or 72 (for Required Maximum Distributions) is not recommended.
Ideal for: A traditional 401k plan is a good option if you believe you will be in lower marginal tax brackets when you withdraw funds in retirement.
2. Roth 401k
Some employers offer an Roth401k option to employees in addition to traditional 401k plans. Roth 401k contributions, which are made with after-tax money, provide tax-deferred growth and tax-free withdrawals, as long as the rules are followed.
Roth 401k users have the same options as traditional 401ks. They can contribute up $20,500 in 2022. Individuals over 50 may also contribute an additional $6,000.
Individuals who withdraw from their Roth 401k before turning 59 1/2 could be subject to a 10% withdrawal penalties on a portion. A Roth 401k is subject to Required Minimum Distributions (RMD), which are mandatory starting at 72.
These retirement accounts are perfect for people who think they are in a lower tax bracket than they will in the future. Individuals aged 59 1/2 and older can use a Roth 401k account to avoid paying taxes on withdrawals. They can also continue growing their accounts tax-free. You can also avoid RMDs by rolling your plan into a Roth IRA once you are 59 1/2 years old or no longer work for the employer. Roth accounts can be a powerful legacy planning tool.
3. Traditional IRA
Are you sure that your 401k contributions are maxed? Is your employer offering a 401k or matching program? An Individual Retirement Account (IRA) is a great option for you and your retirement goals if this is the case.
Traditional retirement accounts are retirement accounts you open yourself (not through your employer) and that you fund with eligible earned income.
You can contribute to an IRA even if your employer has a 401k plan. You should be aware of the income limitations for contributions.
Individuals can contribute up $6,000 in 2022 (if you're 50 or older) or $6,500 (2023 if you're 50 or older)
Your income level may affect whether you are eligible to deduct some or all of your contributions.
- Joint filers can get a full deduction for contributions if neither spouse is covered under an employer-sponsored retirement plan. This applies regardless of the income.
- You can claim a partial deduction if you file as a single, or head of household, and your employer-sponsored retirement plan covers you. If your income in 2023 is $73,000 to $83,000, you can claim a partial deduction. Single filers with a MAGI greater than $83,000 in 2022 are not eligible for a deduction.
- You can deduct the entire amount if you are married or a widow(er) and you file jointly under an employer-sponsored retirement program. If your income in 2023 is between $116,000 to $136,000, you can claim a partial deduction. If you earn more that $136,000 in 2023, there is no deduction.
- Married filing separately can be eligible for a partial deductible if your MAGI falls below $10,000
In general, all withdrawals from a traditional IRA are subject to both federal and state income tax. As with traditional 401ks a 10% penalty is applied to any withdrawals made before the age of 59 1/2. There may be exceptions so make sure to consult your financial advisor before you withdraw from your IRA.
Ideal for: Traditional retirement accounts are best for people who have exhausted their 401k plans and don't have access to employer-sponsored retirement plans. IRAs offer more investment options, such as individual stocks or ETFs. However, the 401k plans might only have a limited number of funds.
4. Roth IRA
Roth IRAs are different from traditional IRAs. They offer tax-deferred growth, and no taxes for withdrawals when the right circumstances apply. Roth IRA contributions can't be deducted from income taxes.
Contributions to a Roth IRA can be made even if you have a traditional IRA or a 401k plan. You should know that if you make contributions to both a Roth IRA and a traditional IRA, the yearly limit applies to both. The total contribution cannot exceed the limit.
These are the contributions limits you can make in 2023.
- Single tax filers with a 2023 MAGI less than $138,000 will have the ability to contribute up to $6,500. If you are 50 years old or older, your contribution limit will increase to $7,500. Single filers with MAGI between $138,000 to $153,000 will see the contribution limit gradually reduce. Roth IRA contributions are not available for those with MAGIs greater than $153,000.
- If your 2023 MAGI falls below $218,000, married couples filing jointly can contribute up to $6,500 per year. The maximum annual amount for those 50 years and older is $7,500 For married couples with a MAGI of between $218,000 to $228,000., the Roth IRA contribution limit begins to decrease and is phased out. Those with a MAGI of more than $228,000 are not eligible to contribute to a Roth IRA.
- Married couples who file separately with a MAGI exceeding $10,000 will not be eligible for a Roth IRA. Contributions at a lower level will be available to those with a MAGI of less than $10,000.
- If a tax filer reports as head or married filing separately but has not lived with their spouse for the past year, they will be allowed to follow the rules and limits applicable to single filers.
You can convert funds from a traditional IRA or 401k plan to a Roth IRA. Conversions from other retirement accounts do not affect your 2023 contribution limit. However, they may increase your MAGI and trigger a phaseout in your Roth IRA contribution amount. People who have income restrictions and aren't eligible for Roth contributions can convert dollars from their traditional retirement plans. Discuss this possibility with a tax professional or accountant to determine if it is a good fit for your financial plan.
Ideal for: RothIRAs allow retirement savings to grow tax-free and can be withdrawn tax-free at any time. Roth IRAs are also free to be left alone. There are no minimum distributions (RMDs), so you can leave them as an inheritance or use them as a future nest egg. If you believe your retirement tax bracket will be higher, Roth accounts can be a good investment tool. It's best to pay taxes now if you believe you will be taxed more in retirement.
5. SEP IRA
SEPIRAs (Simplified Employer Pension) could be another tool to help you reach retirement goals. SEP IRAs, which are profit-sharing plans, allow business owners to contribute to their employees' retirement savings as well as their own. Employers can make tax-deductible contributions for their employees through a SEP IRA.
SEP IRAs must include employees over 21 who have worked in the same employer for at least 3 years and have received compensation of at least $600 from the employer for the year. However, some plans have more restrictive eligibility requirements.
SEP IRA contribution limits can be higher than traditional IRA limits. Contributions cannot exceed 25% of eligible compensation, or $66,000 in 2023. Important to remember that contributions cannot exceed 25% of eligible compensation or $66,000.
SEP IRAs have many contribution rules and guidelines. Talk to a financial advisor or visit the IRS Guidelines page.
Ideal for: Small business owners often don't have enough employees to cover a full-fledged 401k. A SEP IRA can be a great option because it has minimal administration costs.
6. SIMPLE IRA
SIMPLEIRAs (Savings Incentive Match Plan for Employees) is another option that small business owners have. These are a great option for small businesses with less than 100 employees who don't have a retirement plan. They are easy to set up and can be used by any business that has less than 100 employees. If the SIMPLE IRA is being set up, an employer cannot have another retirement plan.
SIMPLE IRAs are similar to a company-sponsored 401k. Employees can contribute via salary deferrals.
The deferral limit on a SIMPLE IRA will be $15,500 in 2023.
Employers are required to contribute a match contribution of up to 3% to the employee's compensation each year. This is based on an eligible compensation amount of $330,000 in 2023.
The following are eligible employees: Those who have earned at least $5,000 in any two years prior to the current calendar calendar year, and those who expect to earn at least $5,000 during this calendar year. You should consult a financial advisor before you withdraw from your retirement account. SIMPLE IRAs can have special penalty.
Ideal for: SIMPLEIRAs are ideal as a start up retirement savings plan for small businesses (less than 100 employees), that do not have a retirement plan. SIMPLE IRAs are typically lower than traditional retirement savings plans in terms of administrative and start-up costs. SIMPLE IRAs don't require filing, so they are easier to manage than other traditional retirement savings vehicles.
7. Self-Directed IRA
Self-Directed IRAs have similar eligibility requirements to traditional and Roth IRA options. They also follow the same contribution guidelines. Self-Directed IRAs permit investors to have assets such as private-held securities, real estate, and gold.
An investor must partner with a trustee to establish a Self-Directed IRA.
It is important that you know that certain investments, such as collectibles or life insurance, are prohibited by the IRS.
The best option for: Traditional or Roth IRAs offer simpler ways to achieve your retirement planning goals.
Similar to 401k plans 457 plans can be offered by state, local governments and non-profits. 457 plans can also be funded by payroll deductions. This means that the employee will get tax-deferred growth up to withdrawals.
The contribution limit for 457 plans will be $22,500 in 2023. Employees 50 years and older can add a $7,500 catch-up provision to their contribution limit.
The key difference with 457 plans is that early withdrawals prior to age 59 1/2 are exempt from penalties but still subject to ordinary income tax rates.
Participants nearing retirement may be able to make up for years they didn't contribute to the 457 plan. The IRS contains more information on 457 plans. However, it is advisable to consult the plan administrator regarding withdrawal and contribution guidelines.
403 (b) plans are retirement plans that certain employees of public schools or tax-exempt 501(c). The 403(b), which allows employees to contribute some salary to the tax-deferred plans, is also available for employers.
The following are eligible employees for the 403(b), plans: Employees who work in public schools, state universities, churches, or certain ministries.
Similar to traditional 401ks and 457s or IRAs. 403(b), retirement plans allow employees the opportunity to save for retirement. The funds will not be subject to tax until they are withdrawn.
Roth contributions are also available in 403(b), 457, and 457 plans.
Tip Personal Capital now provides retirement plan advisors as part our holistic wealth management services.
Considerations when choosing a retirement plan for 2023
There are many options available for retirement savings vehicles, as you can see. We recommend that you consult a financial advisor to determine the best investment tools for you, based on your employer's offers, your income level, and your tax-optimization goals.
These are just a few ideas:
- Take a look at the power of time to help you retire with our study on balances in 401k by age
- Learn 7 Essential Steps to Retirement Planning
- Sign up for Personal Capital to get a complete view of your finances, including retirement funds, and receive free financial tools
- Calculate your retirement readiness today
Frequently Asked Questions
How to Open a Precious Metal IRA?
It is important to decide if you would like an Individual Retirement Account (IRA). You must complete Form 8606 to open an account. You will then need to complete Form 5204 in order to determine which type IRA you are eligible. You must complete this form within 60 days of opening your account. Once this has been completed, you can begin investing. You may also choose to contribute directly from your paycheck using payroll deduction.
You must complete Form 8903 if you choose a Roth IRA. Otherwise, the process will be identical to an ordinary IRA.
To qualify for a precious-metals IRA, you'll need to meet some requirements. You must be at least 18 years of age and have earned income to qualify for a precious metals IRA. Your earnings cannot exceed $110,000 per year ($220,000 if married and filing jointly) for any single tax year. Additionally, you must make regular contributions. These rules apply to contributions made directly or through employer sponsorship.
You can invest in precious metals IRAs to buy gold, palladium and platinum. However, you won't be able purchase physical bullion. This means you won't be allowed to trade shares of stock or bonds.
You can also use your precious metallics IRA to invest in companies that deal with precious metals. This option can be provided by some IRA companies.
An IRA is a great way to invest in precious metals. However, there are two important drawbacks. First, they are not as liquid or as easy to sell as stocks and bonds. This makes them harder to sell when needed. They don't yield dividends like bonds and stocks. Also, they don't generate dividends like stocks and bonds. You will eventually lose money rather than make it.
Is it a good retirement strategy to buy gold?
Although it may not look appealing at first, buying gold for investment is worth considering when you consider the global average gold consumption per year.
Physical bullion is the most popular method of investing in gold. However, there are many other ways to invest in gold. You should research all options thoroughly before making a decision on which option you prefer.
If you're not looking to secure your wealth, it may be worth considering purchasing shares in mining equipment or companies that extract gold. If you require cash flow, gold stocks can work well.
ETFs are an exchange-traded investment that allows you to gain exposure to the market for gold. You hold gold-related securities and not actual gold. These ETFs can include stocks of precious metals refiners and gold miners.
How does gold perform as an investment?
The supply and the demand for gold determine how much gold is worth. It is also affected negatively by interest rates.
Due to the limited supply of gold, prices for gold are highly volatile. Additionally, physical gold can be volatile because it must be stored somewhere.
What are the pros & cons of a Gold IRA?
An Individual Retirement Account (IRA), unlike regular savings accounts, doesn't require you to pay tax on interest earned. An IRA is a good choice for those who want a way to save some money but don’t want the tax. But, this type of investment comes with its own set of disadvantages.
You could lose all of your accumulated money if you take out too much from your IRA. You might also not be able to withdraw from your IRA until the IRS deems you to be 59 1/2. If you do withdraw funds from your IRA you will most likely be required to pay a penalty.
Another disadvantage is that you must pay fees to manage your IRA. Most banks charge 0.5% to 2.0% per annum. Other providers may charge monthly management fees, ranging between $10 and $50.
If you prefer to keep your money outside a bank, you'll need to purchase insurance. A majority of insurance companies require that you possess a minimum amount gold to be eligible for a claim. It is possible that you will be required to purchase insurance that covers losses of up to $500,000.
If you are considering a Gold IRA, you need to first decide how much of it you would like to use. Some providers limit the number of ounces of gold that you can own. Others allow you the freedom to choose your own weight.
It is also up to you to decide whether you want to purchase physical gold or futures. Physical gold is more expensive than gold futures contracts. However, futures contracts give you flexibility when buying gold. Futures contracts allow you to create a contract with a specified expiration date.
It is also important to choose the type of insurance coverage that you need. The standard policy doesn’t provide theft protection or loss due fire, flood, or earthquake. It does include coverage for damage due to natural disasters. You might consider purchasing additional coverage if your area is at high risk.
Insurance is not enough. You also need to think about the cost of gold storage. Storage costs are not covered by insurance. In addition, most banks charge around $25-$40 per month for safekeeping.
A qualified custodian is required to help you open a Gold IRA. A custodian is responsible for keeping track of your investments. They also ensure that you adhere to federal regulations. Custodians don't have the right to sell assets. Instead, they must maintain them for as long a time as you request.
After you've determined which type of IRA is best for you, fill out the paperwork indicating your goals. Information about your investments such as stocks and bonds, mutual fund, or real property should be included in your plan. Also, you should specify how much each month you plan to invest.
Once you have completed the forms, you will need to mail them to your provider with a check and a small deposit. The company will then review your application and mail you a letter of confirmation.
If you are thinking of opening a gold IRA for retirement, a financial professional is a great idea. Financial planners are experts in investing and will help you decide which type of IRA works best for your situation. You can also reduce your insurance costs by working with them to find lower-cost alternatives.
Should You Invest Gold in Retirement?
The answer depends on how much money you have saved and whether gold was an investment option available when you started saving. You can invest in both options if you aren't sure which option is best for you.
Gold is a safe investment and can also offer potential returns. It is a good choice for retirees.
While most investments offer fixed rates of return, gold tends to fluctuate. Therefore, its value is subject to change over time.
But this doesn't mean you shouldn't invest in gold. This just means you need to account for fluctuations in your overall portfolio.
Another benefit to gold? It's a tangible asset. Gold is more convenient than bonds or stocks because it can be stored easily. It is also easily portable.
You can always access gold as long your place it safe. There are no storage charges for holding physical gold.
Investing in gold can help protect against inflation. As gold prices rise in tandem with other commodities it can be a good hedge against rising cost.
Additionally, it will be a benefit to have some of your savings invested into something that won't lose value. Gold rises in the face of a falling stock market.
Another advantage to investing in gold is the ability to sell it whenever you wish. Just like stocks, you can liquidate your position whenever you need cash. You don't even have to wait until you retire.
If you do decide to invest in gold, make sure to diversify your holdings. Don't put all of your eggs in one basket.
Do not buy too much at one time. Start with a few ounces. You can add more as you need.
The goal is not to become rich quick. Instead, the goal here is to build enough wealth to not need to rely upon Social Security benefits.
And while gold might not be the best investment for everyone, it could be a great supplement to any retirement plan.
Can the government take your gold?
Your gold is yours, so the government cannot confiscate it. You worked hard to earn it. It is yours. But, this rule is not universal. For example, if you were convicted of a crime involving fraud against the federal government, you can lose your gold. You can also lose precious metals if you owe taxes. However, even if you don't pay your taxes, your gold can be kept as property of the United States Government.
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (aarp.org)
- This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (smartasset.com)
- The price of gold jumped 131 percent from late 2007 to September 2011, when it hit a high of $1,921 an ounce, according to the World Gold Council. (aarp.org)
- If you accidentally make an improper transaction, the IRS will disallow it and count it as a withdrawal, so you would owe income tax on the item's value and, if you are younger than 59 ½, an additional 10% early withdrawal penalty. (forbes.com)
- 7 U.S. Code SS7 – Designation of boards for trade as contract markets
- 26 U.S. Code SS 408 – Individual retirement plans
- Yahoo Finance provides information about Barrick Gold Corporation's (GOLD) stock price, news, quote, and history.
Investing with gold or stocks
Gold investing as an investment vehicle can seem extremely risky these days. The reason behind this is that many people believe that gold is no longer profitable to invest in. This belief comes from the fact most people see gold prices falling due to the global economy. They feel that gold investment would cause them to lose money. In reality, however, there are still significant benefits that you can get when investing in gold. We'll be looking at some of these benefits below.
Gold is one of the oldest forms of currency known to man. There are records of its use going back thousands of years. It is a valuable store of value that has been used by many people throughout the world. It's still used by countries like South Africa as a method of payment.
Consider the price per gram when you decide whether you should invest in or not. The first thing you should do when considering buying gold bullion is to decide how much you will spend per gram. If you don’t know the current market rate for gold bullion, you can always consult a local jeweler to get their opinion.
It's worth noting, however, that while gold prices have fallen recently the cost of producing gold is on the rise. Although gold's price has fallen, its production costs have not.
Another thing to remember when thinking about whether or not you should buy gold is the amount of gold you plan on purchasing. It makes sense to save any gold you don't need to purchase if your goal is to use it for wedding rings. However, if you are planning on doing so for long-term investments, then it is worth considering. Profitable gold can be sold at a lower price than it was when you bought it.
We hope this article helped you to gain a better appreciation of gold as a tool for investment. We recommend you do your research before making any final decisions. Only after you have done this can you make an informed choice.
By: JJ Lester, CFP®
Title: Types of Retirement Plans for Individuals in 2023
Sourced From: www.personalcapital.com/blog/retirement-planning/types-of-retirement-plans/
Published Date: Thu, 10 Nov 2022 16:00:27 +0000