Just the other day I read a seriously troubling statistic about Americans and their strategies for retirement.
After an analysis of several studies by Time Magazine, roughly One in three American adults has no retirement strategy at all.
Why? Because they haven’t stowed a cent for their golden years.
As in, they haven’t saved anything. Zero. Nada. Zilch.
Worse still … up to 56% of Americans have saved less than $ 10,000 for retirement.
These are hard statistics to believe, but I’m afraid they are absolutely true. As Americans, we are amazing in so many things.
Unfortunately, saving money was not one of our strengths.
Fortunately, there is a silver lining to the retirement bottleneck that most Americans are likely to face. Here it is:
It’s never too late to save for retirement and there are many great investment vehicles to choose from. Better still, you can have more than one!
Yes! You can have a 401 (k) and an IRA
When the average person starts thinking about their own retirement savings, they automatically think about their work-sponsored retirement plan. For most people, that’s a 401 (k) or 403b.
On the other hand, if you’re self-employed, chances are you’ll focus your retirement savings on a SEP IRA or even a Solo 401 (k).
These deferred tax plans are usually the best place to start – not only because they can lower your taxable income in general, but also because you might get an employer match. Always remember to have an employer match your retirement savings free money – and you should never leave it.
Unless you are volunteering to a work-sponsored plan, it is best to contribute at least enough that your employer agrees.
After that, you should research your work-sponsored plan to find out where and how Your dollars are invested. Just because your employer offers a plan doesn’t mean they offer a great way to invest your money!
Also, if your employer has a great plan that will make the most of your dollars, know that you can add up to $ 19,500 to a 401 (k) or 403b by 2020. However, if you are over 50 years old, this is the internal turnover.
Catch-up contributions up to $ 6,500 (up from $ 6,000 in 2018 and 2019) are allowed in certain pension plans, including 401 (k) and 403b.
With self-employed plans like SEP IRA and Solo 401 (k), the rules for maximum contributions are a bit trickier and the amount you can contribute depends on your income that year.
For example, with a SEP IRA, you can contribute up to 25 percent of your compensation with a limit of $ 57,000 (but note that there are no catch-up provisions in this plan). Self-employed workers using a Solo 401 (k), on the other hand, can defer up to $ 19,500 of their salary to their plan through 2020 (up to 100 percent of their compensation), plus an additional 25 percent of compensation with the same total limit of USD 57,000 (or $ 63,500 if 50 or older).
Different types of IRAs to consider
But remember, you can contribute to an IRA on Your traditional retirement accounts.
If, like most Americans, you are behind on saving for retirement, it is good to know that you have some additional options to think about.
Here are two types of IRA to consider, which are both extremely different from each other:
A traditional IRA offers another deferred tax option when it comes to retirement planning. For 2020, you can contribute up to $ 6,000 to a traditional IRA for 2020 unless you are also contributing to a Roth IRA. However, if you are 50 or older, your maximum contribution to an IRA is capped at $ 7,000.
Note: You can contribute $ 6,000 (under 50) or $ 7,000 (50 and over) to an IRA each year. but This is the total amount that you can contribute across all IRA accounts. For example, you can’t contribute $ 6,000 to a Roth IRA and then add another $ 6,000 to your traditional IRA account.
The benefit of a traditional IRA is that your contributions may be tax deductible, depending on whether you are also contributing to another tax-deferred retirement account and your income.
Married couples entering and filing together will begin the opportunity to apply for a tax deduction for traditional IRA contributions with income greater than $ 104,000, provided they also have access to a tax deferred account such as a 401 (k). Once your income exceeds $ 124,000, you can continue to make a traditional IRA contribution, which is non-tax deductible. For single applicants covered by a retirement plan at work, the full deduction is allowed up to an income of $ 65,000, and expires up to an income of $ 75,000. Post tax deduction will no longer be allowed if your income exceeds $ 75,000.
If you are married together and your spouse is on an employer plan, you can make a tax-deductible IRA contribution up to an income of $ 196,000 that gradually expires at $ 206,000. If your combined income exceeds $ 206,000, IRA contribution deduction will no longer be allowed.
Yes, that limits the tax benefit that comes with saving in a traditional IRA – but in general, the restrictions only apply to high earners. And even if you can’t deduct your contributions from your taxes, they can grow tax-free until you start paying out.
All in all, a traditional IRA could be a smart way to save more money whether or not you can deduct your contributions. Ultimately, it really depends on your specific situation and your age goals.
Who Should Consider a Traditional IRA:
- High-income people who want more opportunities to save for retirement: Since there are no income guidelines prohibiting high earners from contributing to a traditional IRA, this can be a good option for those earning more than average salaries. Remember, income over $ 104,000 for a couple filing and attending together means that your ability to deduct your contributions from your taxes may be limited.
- Medium-earners who want to lower their tax liability: Medium income earners who pay high taxes can lower their tax liability by contributing to a traditional IRA, provided they can deduct the full amount.
Who should pass:
- People who do not want to make minimum withdrawals: Since traditional IRAs require you to withdraw at least 70½ or pay a fine first, this is not the best account for people looking to keep their money on hold longer.
- People who want to contribute into old age: Due to the way traditional IRAs are set up, you cannot contribute beyond the age of 70 ½ years. With a Roth IRA, on the other hand, you can contribute for a lifetime, provided you meet the income requirements.
- If you want to diversify your tax liability in retirement: Traditional IRAs are like other deferred tax accounts in that your money grows tax-free, but you pay tax when you start paying out. If you want to diversify your tax liability by paying tax on some of your retirement assets now, consider a Roth IRA.
For a Roth IRA, contribution limits are the same – $ 6,000 for 2020 or $ 7,000 if you are 50 years of age or older.
The big difference is that you make contributions in US dollars after taxes. Once you contribute, your money will grow tax-free until you are ready to make withdrawals in retirement. The cool thing is You don’t have to pay tax on your distributions as you have paid income tax in advance.
This can be good or bad – it really depends on your goals and prospects. By paying tax on your contributions upfront, you can save serious money on your tax bill later in life. On the other hand, who knows what your tax rate will be when you retire in years or even decades.
However, there are other benefits associated with a Roth IRA including the fact that there are no forced withdrawals at any age and you can contribute as long as you are earning an income – even if you are over 70½ years old.
The biggest downside to using a Roth IRA is that there are strict income guidelines that govern who can contribute.
For married couples filing together, your ability to contribute to a Roth IRA starts off with a MAGI (Modified Adjusted Gross Income) of $ 196,000 and ends entirely at $ 206,000. For individual filers, the exit range starts at $ 124,000 and ends at $ 139,000.
Who Should Consider a Roth IRA:
- If you want to diversify your tax liability: Since you are now paying tax on your contributions, you will not have to pay tax on your distributions later. Meanwhile, your money grows tax-free. If you are concerned about what your future tax burden might look like, contributing to a Roth IRA can be a smart way to diversify.
- Someone who wants access to their money: Few people know this, but you can actually take yours Contributions (not your income) anytime from your Roth IRA without paying any penalty. If you feel that you may need to access your funds before retirement, a Roth IRA offers some flexibility in this regard.
- People who want flexibility in contributions and withdrawals: Because individuals who qualify to use a Roth IRA can continue to contribute beyond 70 ½ years and do not have to start distributing at any age, this is one of the most flexible retirement accounts on the market.
Who should pass:
- Someone who wants to use retirement savings to save taxes: Since Roth IRAs are funded with after-tax dollars, no matter how much or how little you earn, you cannot deduct your contributions from your taxes. If you’re looking to save taxes, deferred tax retirement accounts may be a better choice.
- High earners who make too much money: Since expiration times for those who can contribute to a Roth IRA start at $ 124,000 for single applicants and $ 196,000 for married couples filing together, not everyone can contribute to a Roth IRA at all.
Where to open a traditional or Roth IRA
If you want to grow your retirement assets and plan to do so by adding an IRA to your portfolio, there are numerous online brokerage firms that can help.
I’ve checked some of these in depth so I have a few favorites.
Here are my top options when it comes to opening a Traditional or Roth IRA:
TD Ameritrade offers another great option for both novice and experienced investors.
For starters, there are no commissions on stocks, exchange traded funds, or options and you have access to TD Ameritrade’s investment tools and data. The minimum IRA account with a TD Ameritrade account is also $ 0. This makes this option suitable for beginners who just want to dip their toes at first.
Read here to learn more about TD Ameritrade.
As a true robo-advisor, Betterment offers a slightly different approach to IRAs. With Betterment, your IRA is invested in two asset baskets: a bond ETF basket and an equity ETF basket.
Because Betterment helps you make your investment decisions for you, you don’t have to worry about which individual investments to use. In addition, there are no minimum accounts at Betterment and relatively low fees, which are between 0.15 and 0.35 percent depending on the account balance.
Be sure to check out my review of Betterment for 2019.
In addition to these options, we’ve covered a variety of other companies that you should consider adding to your retirement fund over the years. If you continue your research, you should also read these posts:
Are you going to have a 401k and an IRA?
If the thought of saving for retirement is feeling overwhelming for you, remember that it’s perfectly okay to start small.
The good news is that there are all types of retirement accounts to choose from that could be perfect for your situation.
The list includes work sponsored retirement accounts like 401 (k) or 403b for traditional IRAs and Roth IRAs, as well as any other type of retirement account you can think of.
If you want enough cash to retire comfortably, now is the time to start saving. Don’t hesitate and don’t apologize. Time goes by a lot faster than we think, and retirement will be here before you know it.