Over a Third of Americans Say They’ve Never Had a Retirement Account – Here’s How to Start One
When it comes to retirement accounts like the 401(k) or IRA, more than a third of American workers — nearly 36% — say they’ve never had one, according to a recent Bankrate survey. With the new year coming, now is a great time to open a retirement account (anyone with earned income can get one) to better prepare you for success in 2022 and beyond.
And if you’ve already opened a retirement account, you’re on the right track. But if your retirement fund isn’t quite living up to your expectations, you’re not alone. Most American workers – 52%, according to the Bankrate survey – say they are behind where they need to be. In fact, not saving enough for retirement is still one of Americans’ biggest financial regrets, especially as they age.
The good news is that it only takes minutes to open a new retirement account and position yourself for a better financial future. Here’s how the experts say to start.
When it comes to retirement accounts, you have several ways to get started, and some of the easiest take just a few minutes. They also don’t take a lot of time to manage and track.
1. Open a Traditional IRA
“The easiest way to get started with a retirement account is to create an IRA,” says Dan Sudit, partner at Crewe Advisors in Salt Lake City.
With an IRA, anyone with earned income can get one, and you don’t have to rely on an employer to provide a plan. Then you can go to a popular financial institution like Charles Schwab or Fidelity Investments — or the best brokers for IRA accounts — and set one up in minutes.
The traditional IRA can allow you to deduct contributions from your taxable income, meaning you won’t pay tax on them if your income is below a certain level. Contributions and earnings can grow tax-deferred for years before you have to pay taxes when you withdraw the money in retirement. Contributions are limited to $6,000 in 2022, although people age 50 or older can add an additional $1,000.
And there are even a few other benefits for those who open an IRA.
“A lot of people don’t realize that for a married couple, even a non-working spouse may be able to make tax-deductible contributions to a traditional IRA,” Sudit says. This is called a joint IRA.
Additionally, if your income is low enough, you may even qualify for an additional tax credit called a savings credit.
2. Open a Roth IRA
A Roth IRA is another type of IRA that can also provide you with attractive benefits. With a Roth IRA, you contribute with after-tax money — so no tax deduction this tax year — but you can grow your money tax-free and even withdraw it tax-free in the future. retirement age.
Like the traditional IRA, you will need income to participate in a Roth IRA, or you may have a working spouse who qualifies you for one.
The Roth IRA also has income limits, meaning you won’t be able to open one if your income exceeds a certain level.
The Roth IRA is a powerful retirement account, and it can offer powerful features like the ability to pass your nest egg tax-free to your heirs. This is part of the reason why many financial planners believe the Roth IRA is the best retirement plan there is.
3. Get your 401(k) in order
The new year is also a great time to refocus on your employer-sponsored 401(k) or start one if you haven’t already. The 401(k) plan – or its cousin, the 403(b) for government employees – offers a great way to save for retirement and comes in two varieties: the traditional 401(k) and the Roth 401( k):
–The traditional 401(k) allows you to save on a pre-tax basis, meaning you won’t pay tax on contributions. You’ll be able to grow your money tax-deferred, and you won’t pay taxes until you withdraw your money in retirement.
–The Roth 401(k) allows you to save on an after-tax basis, which means you will pay taxes on all contributions. However, you can grow your money tax-free and you will never have to pay tax on qualifying retirement withdrawals.
And unlike an IRA, “there is no income limit for making contributions to a 401(k),” says Jonathan Cahill, CFP, wealth management advisor at Girard. But you cannot contribute more than you earn.
The maximum annual contribution to a 401(k) is $20,500 in 2022, and people age 50 and older can add an additional $6,500 per year as a catch-up contribution.
“Other benefits of a 401(k) plan include protection from creditors, the ability to borrow against it or receive early distributions without penalty for a first-time home buyer,” Sudit said.
4. Maximize Your Employer’s 401(k) Match
The 401(k), however, can give you a bit more juice, beyond those contribution limits. Indeed, many companies give employees matching funds to contribute to their account. In effect, you get an immediate return on your money. Here’s the fine print.
Employers often match a specific percentage of your contribution up to a certain maximum. For example, an employer may match the first 4 percent of your assessed earnings to 100 percent. So if you contribute 4%, your employer contributes an additional 4% and you will set aside 8% in total. However, further contributions will not earn you any additional matches.
“We would definitely recommend contributing to this plan, especially if your company offers a corporate match,” Sudit says. “It’s free money.”
It is therefore often an easy way to quickly increase your savings. However, many employers will require this match to be ‘earned’, meaning you will need to stay with the company for a period of time, often three or four years, to claim the full benefits.
5. Choose your investments
So you enjoy the benefits of a retirement account, but what are you investing in? Sudit advises focusing on potential growth, “focusing on long-term goals and the best investments over that period to achieve them.”
One of the best long-term investments has been stocks, with attractive returns. The S&P 500, a collection of about 500 of America’s largest companies, has returned about 10% annually over long periods. It’s highly diversified, which helps lower your risk, and you can buy into the S&P 500 with just one low-cost index fund.
But even with a proven track record of strong long-term returns, stocks can be volatile in the short term. However, those closer to retirement may want to play it safer and also own bonds. Bonds are generally less volatile than stocks and generate regular income.
If your company offers a 401(k) plan, you may have access to an advisor who can provide guidance and work with you to better understand how your investments fit into your retirement plan.
“If you don’t want the responsibility of choosing funds and their allocation, target date funds may be an appropriate option for you,” says Cahill.
Target date funds automatically shift your portfolio from riskier investments (like stocks) to more conservative investments (like bonds) over time.
At the end of the line
The start of the year is about turning over a new leaf and it’s the perfect time to get your finances in order. Take advantage of these helpful retirement plans to accumulate even more money — often tax-free — and make your retirement years much easier. The more time you spend on your money, the more you will have when that special day arrives.
(Visit Bankrate online at bankrate.com.)