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. Contributions to an individual retirement account (IRA) or a workplace retirement savings plan can help you build the nest egg you need to enjoy the retirement you’re after.

Types of workplace retirement savings plans 

A 401(k)? 403(b)? 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. These types of accounts have grown more popular with employers as the pension plans of yesterday fade.

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

The biggest benefit of these plans is tax-deferred savings and growth of your retirement dollars. You’ll only pay taxes on the funds when you make withdrawals. Your pre-tax dollars are often the foundation of plan savings, but employers may make contributions too. Your contributions help reduce your taxable income.

You control how these funds are invested. Stocks, bonds, money market? It 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.

The difference between Traditional and Roth IRAs

Another possible retirement savings vehicle is an IRA. Like employer-sponsored plans, both Traditional and Roth IRAs are designed for retirement savings. They provide tax benefits that encourage you to contribute to your nest egg over time. With both you contribute after-tax dollars.

Traditional IRA

  • If you’re eligible, contributions are tax-deductible.
  • Contributions grow tax-deferred until you withdraw funds. You can begin taking money without penalty at age 59 ½. Mandatory distributions begin at age 70 ½.

Roth IRA

  • Contributions are not tax-deductible.
  • Contributions grow tax-deferred and offer tax-free distributions, if certain rules are followed. There are no mandatory distributions. You can keep contributing funds as long as you have earned income.

What it means to fund an IRA

Funding an IRA is about taking care of yourself. The 2019 limits for annual contributions are $6,000 if you are under age 50, and $7,000 if you are over age 50. 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 chart to estimate how much your annual contributions can possibly 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 *10.00% 67 $5,284,927
30 $6,000 *10.00% 67 $2,349,330
**50 $7,000 *10.00% 67 $313,072

*Return rates based on the average rate of return as of December 31, 2018, per NerdWallet.com 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. 

 

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