Are you saving enough? Are you completing the necessary steps to become financially prepared for retirement? If you have answered “no”, do not fret. For a majority of North Americans, at this current stage, in both their personal and professional lives, thinking about retirement is daunting. Additionally, there are many factors that hinder individuals from properly saving, mainly the repayment of massive debt. To illustrate this claim further, the Schwab Retirement Plan Services (a division of the Charles Schwab Corporation) surveyed 500 North American adult workers, from various age groups, to gather their opinions on saving for retirement. The results highlighted the fact that “millennials are embracing 401(k) retirement savings plans at a high rate despite facing challenges paying back student loans.” Moreover, 86% of millennials noted that a 401(k) is a must have benefit. Therefore, whether a Baby Boomer, Gen Xer (Generation X), or millennial, the consensus is that having a solid source of retirement is imperative.
Figuring out if you are on the right path to retirement depends on your knowledge of the various plans available, and researching which plan is the best fit for you, your prospective goals, and present financial status. Moreover, when exploring how crucial one’s knowledge of available plans is, one can start by researching the competitive plans offered to employees decades ago. For example, 10 - 15 years ago, employees were covered by generous defined benefit programs where pension plans were solely covered by their employer. However, currently, employees are enrolled in defined contribution programs, which is largely funded by the employee. As a result, the onus has shifted from employer to employee when saving for the future. Furthermore, no matter how unique one’s plan for retirement is, a shared sentiment is that immersing oneself in ever-expanding financial knowledge is necessary. Thus, to continue said education, explore the retirement options found below: 401(k) Plans Synonymous with retirement saving in the United States, more than 73 million Americans within the workforce participate in a 401(k) plan. As such, in order to qualify for a 401(k), one must work for a company that sponsors such plan. Next, once an account has been established, one must contribute a percentage of their salary each pay period, with an employer generally offering a matching contribution. Most 401(k) contributions are made on a pre-tax basis, which means that the percentage is withdrawn from the paycheck before it is taxed. As a result, prospective retirement funds are able to grow without the burden of taxation. 403(b) Plans Plans of this nature are offered to employees of churches, government entities, non-profit organizations, and public schools. As such, employees establish and maintain their own accounts at financial institutions designated by their employer. Likewise, similar to a 401(k) plan, 403(b) contributions are made on a pre-tax basis. Additionally, the money withdrawn is often used to purchase an annuity contract from an insurance company or a custodial account to store investments. 457 Plans Local and state government entities, as well as non-profit organizations, offer 457 plans. Although similar to the 403(b) plan, the 457 plan is different in a variety of ways. First, there is no 10% penalty for withdrawing money before the age of 59 ½ (although the taxation paid on these withdrawals are in accordance with regular income tax rates). Second, employer matching contribution is not allowed. Individual Retirement Accounts (IRAs) Introduced in 1975 as the first government-sponsored, tax-advantaged account offered to North Americans to help save for retirement, IRA accounts are one of the most-recognized, and well-respected, options offered to employees. Moreover, there are two IRA options available: Traditional IRAs and Roth IRAs. Under the traditional IRA, one can benefit from long-term tax-deferred growth while also receiving tax deductions that are equal to the amount of your annual contribution. Additionally, IRAs are funded on a pre-tax basis, with retirees paying taxes on their distributions at an ordinary income tax rate. However, be advised that a 10% penalty looms should withdrawals be made prior to age 59 ½. With Roth IRAs, contributions are made on an after-tax basis, thus there is no tax benefit. However, the trade-off is that earnings are tax-free when withdrawn in retirement. One difference to note between traditional IRAs and Roth IRAs is that you can withdraw contributions without penalty at any age! Furthermore, it is worth noting that there is an IRA contribution limit for both the traditional IRA and Roth IRA combined: $6,500 if you are 50 years of age or older. Finally, if your income is too high, you are not allowed to contribute to a Roth IRA. Simplified Employee Pension Individual Retirement Agreement (SEP IRA) For those who are either self-employed, or self-employed with employees, this plan is ideal. Such a plan is offered to provide business owners, and their employees, retirement benefits. SEP IRA funds can be invested in the same way as funds under most IRAs, with contributions made to the account being tax-deferred and in turn receiving a tax-deductible. Such a tax-deductible can further reduce your tax bill. Lastly, if one is self-employed, one can store a large lump sum in the value of $55,000 or 25% of gross earnings, whichever is less. Savings Incentive Match Plan for Employees (SIMPLE IRAs) SIMPLE IRAs are geared towards small businesses, with 100 or fewer employees, and those who identify as self-employed. Thus, under this plan, both employers and employees can contribute money in a similar fashion to that of a traditional IRA. The contribution limit is $15,550 if you are 50 years of age or older. Although it is widely assumed that millennials are frivolous with finances, we are boldly proving that we are, perhaps, not inept when it comes to saving money. Let us continue to bust myths as we help steer the course to a solid financial future!
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