Retirement 101: Which Retirement Account is Best For You?
June 8, 2023
No matter what stage of life you’re at, investing in a retirement fund is important. The earlier you can start saving and investing, the better. Here are some tips to help you pick the best retirement account for you and get your savings on track for your future.
Saving for retirement as early as possible can have a dramatic impact on your retirement preparedness, not only because it means saving more over your lifetime but also because those savings have a longer time to grow and compound. Even if you can only start with 1% of your income, it’s better than nothing and helps build the habit of retirement saving. There are a few types of retirement accounts to consider that can help your savings grow.
For the employee: 401(k) or 403(b)
401(k) and 403(b) plans are both common employer-sponsored retirement plans that help you make deferred contributions toward your retirement. Typically, if you work for a private or for-profit company, you will be offered a 401(k) retirement plan. Nonprofits or certain government agencies, such as public schools, usually offer a 403(b) plan.
The most you can contribute to either account in a year is $20,500, or $27,000 if you are age 50 or older. If your company offers a 401(k) plan or 403(b) plan, begin making contributions as soon as you can. It’s a good idea to reach the required contribution level to receive the maximum matching amount, if your employer offers one.
Both accounts require you to begin withdrawing your retirement money by age 72. Though, if you choose to withdraw sooner than age 59 ½, you will need to pay state and federal income taxes as well as a 10% penalty on the money you withdraw.
For the self-employed: Traditional IRA or Roth IRA
If you don’t have access to an employer plan, make it a goal to contribute up to the full amount allowable for the current year to a Traditional IRA (Individual Retirement Account) or a Roth IRA.
The key difference between a Traditional and Roth IRA is that a Traditional IRA may allow you to make pre-tax contributions, in turn providing immediate tax benefits. Whereas a Roth IRA allows you to make after-tax contributions so you can enjoy tax-free withdrawals in the future. The most you can contribute to either type of account in a year is $6,500 (or $7,500 if you are over the age of 50).
When it comes to withdrawing your funds from either account, there are a few considerations. With a Roth IRA, you may start to withdraw money both penalty- and tax-free after five years and age 59 ½. For a Traditional IRA, your withdrawals are penalty-free, but taxed as current income after age 59 ½. You’re also required to start withdrawing your funds once you reach age 73.
What if you are behind in saving for retirement?
If you're under age 40, it is suggested you save more and invest for growth through a diversified investment mix. If you're over 40, you may want to consider a combination of increased savings, reduced spending, and working longer, if possible. It may be helpful to talk to a financial advisor who can provide more insight to steps you can take.
How can OU Credit Union help?
At OU Credit Union, our goal is to provide our members superior financial solutions, comprehensive products, and unparalleled service. The relationship members have with OU Credit Union extends to MSUFCU Financial Solutions, an Investment and Insurance Service Center, made available through broker-dealer CUNA Brokerage Services Inc. (CBSI).
Whether you're looking for help creating a comprehensive retirement plan assistance with a specific financial goal overall financial guidance, they are here to help. To learn more, visit oucreditunion.org/financialplanning.
Tags: Retirement, Tips and Tricks