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About 75 percent of Americans have access to a 401(k) or a similar employer-sponsored retirement plan. A 401(k) is an effective, convenient way to save for retirement. Money is automatically withheld from your paycheck using pre-tax dollars, and you can contribute up to a set limit each year — plus an additional “catch-up” amount if you’re age 50 or older. You’ll pay income taxes on contributions and earnings when you withdraw funds. If you access your money before age 59½ you’ll also pay a 10 percent penalty tax, and keep in mind, the money in your 401(k) is exposed to market volatility.
About 51 percent of employers with 401(k) plans offer a matching program. A typical employer
match is 50 percent of the employee contribution, up to 6 percent of your salary. So if you have a 401(k), your first retirement-saving priority should be to max out your employer match — it’s free money!
But the 401(k) isn’t the only game in town. If you want to put aside more than the amount your employer will match, don’t have access to a 401(k), or want to ensure a guaranteed lifetime income, here are three other retirement savings options to consider:
- Traditional IRA
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Since 2019, people have been able to contribute up to $6,000 each year to an Individual Retirement Account — $7,000 if you’re 50 or older. If you don’t have a 401(k) or similar retirement account at work, you can deduct your full IRA contribution from your taxes. Married couples can each have their own IRA and can each take advantage of the full combined contribution tax-deferred. A traditional IRA may be subject to IRS contribution limits, depending on when you reach age 70½.
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As with a 401(k), you’ll pay taxes on contributions and earnings when you withdraw funds. And if you withdraw funds before age 59½, you’ll pay an additional 10 percent penalty, also like a 401(k). A traditional IRA is subject to required minimum distributions (RMDs) after age 70½ — for some people. Changes made by the SECURE Act in 2019 allows anyone who turned 70 on July 1, 2019, to delay taking their RMDs until age 72.
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Roth IRAs have the same contribution limits as traditional IRAs. You can’t deduct Roth IRA contributions from your current taxes, but you can withdraw both contributions and investment earnings tax-free after age 59½ if the account is at least five years old. Unlike a traditional IRA or 401(k), there’s no penalty for withdrawing contributions before 59½, although there is a 10 percent penalty on early withdrawal of account earnings. With a Roth IRA, you’re not required to withdraw funds by 70½ and you can even keep contributing to the account after that age. You can save money in both a traditional IRA and a Roth IRA as long as the total amount you contribute doesn’t exceed the annual limits set by the IRS.
- Annuity
- One key thing 401(k)s and IRAs (excluding annuities) have in common is that when your money is gone, it’s gone. Annuities, on the other hand, provide insurance against the risk of outliving your money after you retire, and may also provide protection from loss due to market downturns.
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Life expectancy has been increasing, with the average 65-year-old expected to live to about age 82 for men and age 85 for women. And while most of us probably won’t live to be 100, some men and women can expect to see the century mark. Whether you live to be 80, 90 or even 100 and beyond, it’s important to consider an annuity that provides a guaranteed lifetime income.
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