Hopefully, you’ll have many years to live life however you choose once you retire. However, you’ll need a safety net to help you financially through those years. Whatever retirement strategy you choose will be responsible for providing you with income in retirement. There are many retirement accounts available today, all with their own positive and negative attributes. Asking these essential questions, along with the help of a financial professional, can help set the foundation for your future.
Here is a list of questions to help guide you on deciding on a retirement account:
One of the main goals of a retirement account is to build on the money you put in. If your 401(k) is sponsored by your employer, make sure to ask if they offer contribution matching. This is an easy way to help build your account. Another method is to open or contribute to an IRA once you have reached your maximum contribution limit on accounts such as a 401(k). Some employer plans feature an option to annuitize your money, allowing a certain amount of your withdrawal to be distributed to you every year.
Having an account that defers taxes until withdrawal, such as a 401(k) or traditional IRA, may initially leave you with more money to build on. One of the risks is that taxes could increase by the time you retire. A Roth IRA is an example of an account that offers tax-free withdrawals for distributions provided certain conditions are met. You should determine your goals and future plans to help decide which will best fit your needs.
Many retirement accounts feature an IRS penalty to discourage from withdrawing before reaching retirement age as well as surrender charges. For accounts including a 401(k), 403(b), and IRA, you may be subject to an IRS 10% tax penalty for withdrawing before age 59 ½. There are exceptions, such as a first-time home purchase or using IRA funds to pay your medical insurance premium after a job loss. Consider speaking with a qualified tax professional for any questions on tax penalties.
Investing always involves risk. There is the risk that you may not receive gains on your investment or loss of principal when placing it in a retirement account. A general rule of thumb with any account associated with stocks is to have a diverse portfolio to help protect you from unnecessary risk. A risk associated with a Roth IRA is that you will not receive the upfront tax break you would with a traditional IRA. There is also a limit placed by the IRS on how much you can contribute to a Roth IRA. As stated above, a big risk for tax-deferred accounts is that taxes could increase by the time you retire. You should assess your personal situation and risk tolerance before considering investing in a retirement account, and balance risk and reward.
Planning for retirement can be confusing, as there is a vast amount of information that is constantly changing. Speaking with a financial professional is a key step to creating a retirement strategy. You should analyze your future financial needs and risk tolerance so your financial professional can best help you. You don’t have to be an expert to prepare for a successful retirement, and asking these questions is a great place to start.
Want more information on retirement accounts, taxes in retirement, or other helpful retirement topics? Check out one of our courses in your area!
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