Interested in an IRA? Here's a comparison of some of our top-rated IRA accounts. We have a full guide to opening an account here. Many employers offer to match a portion of what you save. The k perk that gets all the headlines is the employer match. If you do nothing else, at least contribute enough to your account to nab that free money.
Play around with our k calculator to see how your savings will grow with a k — and the difference incremental changes, including any company match, will make over time.
This is a good time to mention there are several types of k plans, including the two main kinds: the traditional k and the Roth k. The traditional or regular k offers upfront tax break on your savings. Pretax contributions make saving a little less painful. Contributions to a traditional k plan are taken out of your paycheck before the IRS takes its cut, which supersizes each dollar you save.
Here are the contribution limits to shoot for this year. Contributions can significantly lower your income taxes. Besides the boost to your savings power, pretax contributions to a traditional k have another nice side effect: They lower your total taxable income for the year. Investments in the account grow unimpeded by Uncle Sam Once money is in your k , the force field that protects it from taxation remains in place. This is true for both traditional and Roth k s.
As long as the money remains in the account, you pay no taxes on any investment growth. Not on interest. Not on dividends. But how? The answer is a careful asset allocation, the process of deciding where your money will be invested. Asset allocation spreads out risk. Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky. Instead, you want a road map that allows for the appropriate amount of risk and keeps you pointed in the right long-term direction.
Investors who have decades to save should take more risk early on and gradually dial it down as retirement approaches. As a rule of thumb, you can subtract your age from or to find the percentage of your portfolio that should be invested in equities; the rest should be in bonds. Using will lead to a more aggressive portfolio; will skew more conservative. Or will I make a mistake and sell? If you live for that kind of thrill, you might take more. We have a risk tolerance quiz here.
Stock funds are divided into categories. Your k will probably offer at least one fund in each of the following categories: U. If you have access to an international bond fund, you might put a bit of your savings in there to diversify globally. Expense ratios are the fees carried by investments, and they range widely. You might find your k offers only one choice in some of the above categories, but when you have a selection, you should generally pick the lowest-cost option — often an index fund.
Even small differences in fees can have a huge effect over time. More than million Americans are covered by defined-contribution plans, like a k or similar, nearly half of U. And nearly half of those plans are immediately vested participants in employer matching contributions, according to a report by Vanguard.
While not all employers offer it, the Roth k is an increasingly popular option. This version of the plan requires the employee to pay income tax immediately on the contributions.
However, after retirement, the money can be withdrawn with no further taxes due on either the contributions or investment earnings. Employer contributions can only go into a traditional k account—not a Roth.
For most people, the contribution limits on k s are high enough to allow for adequate levels of income deferral. Employers also can provide non-qualified plans such as deferred compensation or executive bonus plans for these employees. A company that offers a k plan typically offers employees a choice of several investment options. The options are usually managed by a financial services advisory group such as The Vanguard Group or Fidelity Investments.
The employee can choose one or several funds to invest in. Most of the options are mutual funds, and they may include index funds , large-cap and small-cap funds, foreign funds, real estate funds, and bond funds.
They usually range from aggressive growth funds to conservative income funds. The distribution rules for k plans differ from those that apply to individual retirement accounts IRAs. However, while an IRA withdrawal doesn't require a rationale, a triggering event must be satisfied to receive a payout from a k plan. The following are the usual triggering events:.
The IRS mandates k account owners to begin what it calls required minimum distributions RMDs at age 72 unless that employer still employs the person. This differs from other types of retirement accounts. Money withdrawn from a k is usually taxed as ordinary income. This rollover allows them to escape the limited investment choices that are often present in k accounts.
If you decide to do a rollover , make sure you do it right. In a direct rollover , the money goes straight from the old account to the new account, and there are no tax implications.
In an indirect rollover, the money is sent to you first, and you will owe the full income taxes on the balance in that tax year.
If your k plan has employer stock in it, you are eligible to take advantage of the net unrealized appreciation NUA rule and receive capital gains treatment on the earnings. That will lower your tax bill significantly. To avoid penalties and taxes, a rollover must take place within 60 days of withdrawing funds from the original account.
If your employer permits it, you may be able to take a loan from your k plan. The borrower must repay the loan within five years. A longer repayment period is allowed for a primary home purchase. In most cases, the interest paid will be less than the cost of paying real interest on a bank or consumer loan—and you will be paying it to yourself. But be aware that any unpaid balance will be considered a distribution and taxed and penalized accordingly.
Internal Revenue Service. The Vanguard Group. Accessed Feb. United States Congress. Retirement Planning. Your Privacy Rights.
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