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When it comes time to choose the best type of retirement account the variety of options can make your head spin. Ideally you should start saving in your 20’s to get the most compounding benefits. The more money you can put away for the most amount of time, the more interest you will earn over the years.
If you’re a little late to the game that’s fine too, just start saving as soon as you possibly can. Here are some helpful points in understanding what your best option is depending on your current situation.
#1) Tax Favored Options
If you are looking for a tax favored option for a retirement account, then going with an Individual Retirement Account (or IRA) is a good choice. This type of account allows you to invest some of your tax returns each year straight into the retirement account.
This is helpful both because you don’t have to think about it throughout the year, but also because you don’t have to pay taxes on the investment gains that you make. You do however pay taxes on it when the money is withdrawn to be used when you’re ready to retire.
When you have an active IRA account, you are free to invest the money anywhere else you like, but you cannot withdraw it until retirement without paying some hefty fees.
#2) For the Beginner
A Roth IRA is a good choice for someone who’s just starting out with their retirement investing because the money can be withdrawn before retirement if necessary, and the money isn’t taxed at the point that it is removed from the account. Just like before, as with any other money. This provides a bit more flexibility and works well if you anticipate making more money in the future.
#3) At Work
If your job provides an option for retirement accounts it will be a 401 (k). Basically this option allows you to have a certain amount of money pulled from your paycheck and put directly into the account. Since the money is placed into the account before it is taxed, it allows you to pay taxes on the salary difference that is left over, instead of your whole salary on paper.
One bonus to a 401(k) account is that many employees will match a certain percentage that you put in. If you have that option available to you you should not let it pass you by. It can feel sort of annoying to know that you’re not getting all of your paycheck at each pay period, but if you can put that thought aside you will be prepping yourself for your future quite nicely.
#4) For the Self Employed
If you work for yourself in some regard and don’t have employees you can use an SEP IRA as a retirement account. You basically get your own retirement account that you feed with your freelance income and then you can deduct that money from your income taxes. There are different limits on SEP IRA accounts regarding how much money you can contribute to them however, which should be a consideration.
You might even end up with a couple different retirement plans based on your job progression throughout the years but there are ways to consolidate them.
#5) Other Accounts that Can Boost Your Savings
A health savings account is not a retirement account, but it can help to boost your savings in one. Basically a health savings account can go alongside a health insurance policy, which will both lower your insurance plan and also grow money that is deferred on taxes. When you need to pay for doctor’s visits and such you can access the money and use it for that, or you use your normal and income and leave that cash to grow in there.
The money can be withdrawn when you reach the age of 65 and pay the taxes on it. or you can continue to use it for medical bills tax free.
Have you started saving for retirement and considering your other options or are you just looking for the best place to begin? Let us know about your experiences so far!