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How To Start Your Retirement Plan

By David McAlpine, Peoples Bank Wealth Management Group Officer
 
Photo: Man budgeting
Text: If you're new to the workforce or new to retirement planning, you may wonder how to save for retirement and what the best options are for you. 

If you’re new to the workforce or new to retirement planning, you may wonder how to save for retirement and what the best options are for you. In this article, we break down retirement savings account options by category: employer-sponsored plans and ones you can open on your own. Learn about which of the following retirement plans offer tax benefits and other advantages. If you have questions, our Wealth Management team is here to help! 


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Through your employer

Here are the most common types of employer-sponsored retirement plans and other tax-advantaged savings accounts.

401(k) or 403(b) Plan

Named after a sections of IRS code, 401(k) & 403(b) plans are qualified profit-sharing plans in which employees can contribute a percentage of their pre-tax wages. Employers will often match a percentage of your contribution, though you may have to wait a specific number of years before employer contributions are partially or fully “vested.” This means that if you leave your job before becoming 100% vested, you may only be able to take your own elective contributions with you (which are 100% vested from the beginning).  Although these funds are being set aside for your retirement, your ability to access the funds may be limited (per the terms of your employer’s plan document) prior to retirement and/or separation from service with the employer, according to the terms of your employer’s plan.


Tax Advantages of a 401(k) & 403(b) Plan

Photo: Hands on a calculator
Text: Because you can contribute pre-tax dollars, less of your income is subject to federal tax. This may help reduce your overall tax bill, depending on how much you make.

Because you can contribute pre-tax dollars, less of your income is subject to federal tax. This may help reduce your overall tax bill, depending on how much you make. Talk to a tax professional to find out for sure. When you’re ready to make withdrawals in retirement, your 401(k) distributions will be taxable income.


Contribution Limits

There is an annual limit on your 401(k) & 403(b) plan contributions:

  • $19,500 for 2020 and 2021

If you’re 50+, you can make an additional “catch-up contribution” of up to $6,500 in 2020 and 2021, and similar to other plans, you may have limited access to these funds, depending on your employer’s policy.

Of course, you may not be able to save the full annual contribution limit and that’s okay. Start small if you need to and raise your contribution as you receive salary increases. One goal to aim for is to contribute enough to get your full employer’s match. Otherwise, you’re giving up “free money.”


Roth 401(k) & 403(b) Plans

This option works the same as a regular 401(k) & 403(b) except for the tax advantages. With a Roth account, your contributions come from post-tax income and then you can enjoy tax-free withdrawals in retirement. Depending on the income tax rate now versus when you retire, a Roth 401(k) or 403(b) may help you save money on taxes in retirement. You can also divide your retirement savings between traditional and Roth accounts to take advantage of both tax benefits. It is important to note any employer contributions are typically deposited into the pre-tax portion of the 401(k) or 403(b) regardless of whether you elect to contribute to a Roth 401(k) or 403(b).

It’s important to note that investments inside a 401(k) or 403(b) plan are not FDIC-Insured.


Simple IRA

If you work for a smaller employer, you may be offered to participate in a Simple IRA plan. 

Simple IRA plans are employer sponsored retirement plans that can be offered by employers with 100 or fewer employees.  Simple IRA plans may offer a match, or the employer may contribute to your plan regardless of whether or not you contribute.  With a Simple IRA, you as the employee can contribute up to $13,500 per year into the plan for 2020 and 2021 plus an additional $3,000 a year if you are 50 or older. 

All employee contributions into the plan are made on a pre-tax basis. All contributions (including employer contributions) are immediately 100% vested, which means all the funds are available to you should you decide to change employers.


Health Savings Account (HSA)

While your HSA account is primarily meant to pay for any out-of-pocket medical costs, it may surprise you that an HSA can be used as a retirement vehicle as well.

The HSA’s tax advantages make is a great option to save for retirement because any contributions made via payroll contributions are all pre-tax and your account balance grows tax-free, so any interest, dividends or capital gains you earn are nontaxable.

Another benefit is that after you turn 65, you have access to your funds without penalty which can also help bridge the gap for medical expenses before you become eligible for Medicare.


Simplified Employee Pension (SEP) IRA

Photo: Clock & cash on a balance.
Text: SEP IRAs are a good option for sole proprietors, partnerships, and small corporations because they're less expensive to start and operate 
than a conventional retirement plan.

SEP IRAs are a good option for sole proprietors, partnerships, and small corporations because they are less expensive to start and operate than a conventional retirement plan. With a SEP plan, employers can set aside money for retirement for themselves and their employees, up to 25% (or $57,000 in 2020 and $58,000 in 2021) of each employee’s annual wages or salary. Unlike with a 401(k), 403(b) and Simple IRA plans, only the employer contributes to a SEP plan.


On your Own

If you don’t have access to an employer-sponsored retirement account, you can still open a retirement savings account on your own through the bank.

Here are the options:

Traditional IRA

An Individual Retirement Account (IRA) is similar to a 401(k), except you are the one who opens it and contributes, not your employer. You can contribute up to $6,000 a year and receive an income tax deduction (subject to certain income limitations for active- participants in a retirement plan).  If you are over the age of 50, you can contribute an additional $1,000 as a catch-up provision. You’ll only pay income tax on withdrawals in retirement. Withdrawals prior to age 59 ½ are still subject to income tax, but also a 10% early distribution penalty unless the distribution is for an applicable exception.

Roth IRA

Photo: Couple on the beach
Text: Roth IRAs offer you a chance to enjoy tax-free withdrawals in retirement.


As with a Roth 401(k), Roth IRAs offer you the chance to enjoy tax-free withdrawals in retirement.  Contributions are paid after taxes and the same contribution limits apply as with a Traditional IRA.  An individual cannot collectively contribute more than $6,000 to a Traditional and Roth IRA per year. Those 50+ can contribute an additional $1,000 between the Traditional and Roth IRAs. Income limits and annual contribution limits apply.


Another cool benefit of the Roth IRA is the ability to withdrawal the amount you contribute to the Roth IRA anytime without being subject to taxes and penalties.


As with other investment products, IRAs are not FDIC-insured.


Other Investment Vehicles

Outside of retirement, there are other investment vehicles that be utilized to save for retirement.  For example, an investment management account allows you to pay taxes on any interest, dividends, or capital gains as they occur, but you may have more access to the funds prior to retirement.  Various insurance products can also be utilized to enhance retirement savings as well.


Contact our Wealth Management team today!

Now that you understand some of your options for retirement savings, you may still have questions about your specific situation. At Peoples Bank Wealth Management Group, we treat you like an individual with a unique set of goals and objectives. For personalized wealth management advice, fill out the Quick Contact Form or give us a call at (712) 722-0100 today.


 

Peoples Bank Wealth Management Group does not provide legal or tax advice.  Please consult with your legal or tax advisor in regards to your individual situation.  Investments involve risk including the possible loss of principal.  Investment products are not FDIC insured, not a bank deposit, not guaranteed by the bank or any U.S. Government Agency and principal may lose value. 

 

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