Prepare for a better retirement with tax-advantaged accounts

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Tax-advantaged retirement accounts could be the answer to greater financial security. Contributing to a workplace retirement savings plan or an individual retirement account (IRA) helps you build tax-deferred savings now that could help you enjoy the retirement you want later in life.

Types of workplace retirement savings plans

You’ve probably heard of a 401(k), 403(b) and 457. They’re not a brand of jeans, but like a good pair of denims, these defined contribution plans are meant to stick with you for a long time.

  • The 401(k) is the most common and is available to employees of private and public employers.
  • The 403(b) is for public education employees and some nonprofit employees.
  • The 457 plan is limited to government employees and certain nonprofits. An employer may offer a 457 as a supplement to a 401(k) or 403(b) plan.

One great advantage of these types of plans is the potential for an employer to make a matching contribution to your account when you contribute. These types of plans also allow your retirement dollars to grow tax-deferred. This means you’ll only pay taxes on the funds when you make withdrawals later. And contributions made to an employer plan today help reduce your current taxable income.

You control how these funds are invested. You will have a variety of investment options to choose from ranging, from conservative to aggressive. Which you choose depends on your age, risk tolerance and investment knowledge. The right mix of investments is a key part of preparing for retirement, so be sure to check with your financial advisor.

What is a tax-advantaged IRA?

Another possible retirement savings account is an Individual Retirement Account (IRA). Both Traditional and Roth IRAs are designed for retirement savings. These individual plans provide tax benefits that encourage you to contribute to your retirement fund over time.

Traditional IRA

  • You can contribute pre-tax dollars.
  • If you’re eligible, contributions may be tax-deductible.
  • Contributions grow tax-deferred until you withdraw funds. You can keep contributing funds at any age as long as you have earned income. You can begin taking money without penalty at age 59 ½. Mandatory distributions begin at age 72 for some.

Roth IRA

  • You can contribute after-tax dollars.
  • Contributions grow tax-deferred and offer tax-free withdrawals during retirement, if certain rules are followed. There are no mandatory distributions. You can keep contributing funds at any age as long as you have earned income.

What it means to fund an IRA

Funding an IRA is about taking care of yourself beyond what an employer might contribute. For 2020, IRA contribution limits are set at $124,000 for single tax filers or $196,000 for filers who are married filing jointly.

The maximum annual contribution for this year is $6,000 if you’re under age 50. If you’re over age 50, the annual limit increases to $7,000 ($6,000 standard contribution + $1,000 catch-up contribution). You can contribute to more than one IRA, but the total annual contribution limits are the same as if you fund only one.

Review your finances to determine what contribution levels will work for you. The earlier you commit to contributing to an IRA, the longer you have to grow your savings. There could be a nice reward at the end if you can live with a little less now.

View the sample chart below to estimate how much your annual contributions may grow by the time you retire, depending on how early you begin saving.

IRA Contribution Growth Example

Starting Age Annual Contribution Interest Rate Retirement Age Savings
22 $6,000 *6.00% 67 $1,971,690
30 $6,000 *6.00% 67 $1,156,287
50 $7,000 *6.00% 67 $226,443

*Return rates are an example based on the average industry rate of return as of December 31, 2019 per for Traditional IRA plans.

Contribution limits increase if you are age 50 and over. 

retirement calculator can help you estimate what you may need in retirement. Use these tax-advantaged savings accounts to help you get there.

The advice provided is for informational purposes only. Contact a tax advisor for additional guidance.

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