Nowadays it’s more common for people to switch jobs or careers every 4.2 years than it is for them to stay at the same job until retirement. Whether you are a full-time employee, have a part-time hustle, are fully self-employed, or have employees of your own, it’s important to understand the different ways to plan for retirement in order provide yourself (or your employees) with the best options for retirement.
Here’s a quick overview of the most common retirement plans :
401K
What is it?
- A tax-advantaged, defined-contribution retirement account offered by many employers to their employees.
- Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions.
- The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement.
Roth IRA
What is it?
- A special retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free. Roth IRAs are best when you think your taxes will be higher in retirement than they are right now.
- You can’t contribute to a Roth IRA if you make $140,000 as a singles individual or $208,000 as a married couple.
- In 2021, the contribution limit is $6,000 a year unless you are age 50 or older—in which case, you can deposit up to $7,000
Roth 401K
What is it?
- A Roth 401(K) is a tax-advantaged retirement savings vehicle that combines features from traditional 401(k) plans and Roth IRAs
- Contributions and earnings can be withdrawn tax-free as long as certain criteria are met
- For 2020 and 2021, the contribution limit is $19,500 and those 50 and over can contribute an additional $6,500
If you are starting a new job and are unsure which plan to select, here’s something to consider!
A Roth 401(k) can be rolled over into a Roth IRA when you leave your job or retire which will eliminate the Required Minimum Distribution(RMD) Requirement. This is best used if your retirement savings and retirement income (Social Security, pension, etc.) are currently heavily weighted towards tax-deferred assets.
Do you have specific questions about retirement planning and establishing generational wealth?
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