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Types of Retirement Savings Accounts

Choosing the correct retirement account can make all the difference when it comes to having a good retirement. Of course, the best investments for these accounts are determined by your age and level of risk tolerance. Younger people can be more aggressive with their investments. When market downturns occur, they can wait for the market to rise. However, soon-to-be retirees don’t have time, so they need to invest more conservatively. A retirement savings account A retirement savings account is a vehicle for setting aside money for retirement that offers significant tax benefits. As fewer Americans receive pensions, retirement accounts are becoming increasingly important as a source of income for those who are no longer employed. There are various types of retirement savings accounts. We’ll go over a few of the most common ones. Traditional Individual Retirement Accounts (IRAs) Traditional IRAs allow you to make pre-tax contributions to your retirement account. Until you withdraw the money at retirement, the investments remain tax-deferred. By the age of 72, you must begin taking Required Minimum Distributions (RMDs). Contributions to a typical IRA may be tax-deductible depending on your income and whether you filed as single or married. Your payments are entirely deductible if you aren’t enrolled in an employer-sponsored plan at work.  Roth IRAs Post-tax dollars are used to fund Roth IRAs. So you can’t deduct Roth IRA contributions, but they have other advantages. When you withdraw money in retirement, you don’t have to pay taxes. A Roth IRA, unlike a standard IRA, does not require RMDs. You should never take money out of these accounts if you don’t have to. Roth IRA contributions are not available to everyone. Married couples filing jointly can donate the whole amount if their AGI is $204,000 or less. Single filers or individuals that file as head of household can contribute the whole sum limit. So the combined AGI is either $129,000 or less, but a single filer or a household head can contribute up to the limit. Those earning up to $144,000 can make partial payments. Contributions over that amount are not permitted. SEP-IRAs A Simplified Employee Pension Plan (SEP) IRA is beneficial in helping self-employed people save for retirement. A SEP can be established by any size firm, including sole proprietorships. 401(k) A 401(k) is a popular retirement savings plan. Employees contribute to their 401(k) plans through pre-tax payroll deductions. This means that employees can lower their taxable income by contributing to a 401(k), which is tax-deferred until withdrawals are made. Another benefit of a 401(k) plan is that employers can match employees’ contributions up to a particular percentage of employee compensation. Other retirement plans include 403(b), 457(b), and 401(a) plans. Eligibility for a retirement savings account What can you do with a retirement savings account? You can put your money into several investments in a retirement plan, including stocks, mutual funds, bond funds, ETFs, money certificates of deposit, annuities, market accounts, and real estate. Withdrawal from a retirement account Withdrawals made before age 59 ½ are subject to a ten percent IRS penalty. The early withdrawal penalty has some exceptions, including purchasing the first home, qualified school expenses, disability, expenses connected to birth or adoption, and unreimbursed medical costs if unemployed. Contributions to a retirement savings account The maximum traditional IRA and Roth IRA contribution limits for 2022 are $6,000 for those under 50 and $7,000 for persons over 50. To satisfy the maximum contribution limit, you must have adequate earnings. Otherwise, you won’t be able to contribute the full amount. It’s possible to contribute to the two account types together. But the contribution limits must be adhered to. You could, for example, put $3,000 into both types of accounts. The typical IRA contribution can be deducted if you are eligible. Considerations for a retirement savings account Earnings from a job can only be contributed to a Roth IRA, a regular or SEP-IRA, or a combination of the two. Money received as a gift or from investments is not eligible. Many people continue to work past the age of retirement.  People with employer-sponsored 401(k)s and traditional IRAs must take forced withdrawals by 72. However, if you’re still working then, you can continue contributing to a retirement savings account.
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