Like so many other people, I was not concerned about saving for retirement in my 20s. I was already struggling to pay bills and avoid crushing student loans. Planning for retirement was the least of my concerns. Now that I am in my 30s and settling into my career, I am kicking myself for not starting sooner. However, it is never too late to begin. If you are late to the game, here are some of the best retirement accounts to help you start saving for the future.
The 5 Best Retirement Accounts for Beginners
If you don’t know where or how to begin saving for the future, it is always wise to seek professional advice. When I sat down with my financial advisor, he clearly explained the different investment vehicles available to me. After reviewing loads of information, these five types of retirement accounts seemed to be the best place to get started!
1. Employer Matching 401(k)
The easiest place to begin saving for retirement is through your current employer. Many companies offer employer matching 401(k) retirement plans for their employees. These are retirement savings plan to which your employer also makes annual contributions.
How much you earn depends on the amount you contribute and your employer’s matching program. Some companies match a percentage of your contribution, up to a set portion of your salary. The best plans match up to 100%. However, employers typically choose partial matching scheme. In other instances, the employer’s contribution is based on a pre-determined dollar amount, regardless of the employee’s earning.
While the level of benefits varies, you should always take advantage of employer matching 401(k)s. If you don’t utilize these accounts, then you are missing out on free money.
2. Solo 401(k)
Also referred to as one-participant-k, a Solo 401(k) is great for people who own their own business. Since self-employed individuals do not have access to employer sponsored retirement plans, it provides a great alternative savings vehicle.
To qualify for this type of retirement account, you have to be self-employed and the only employee. The rules state you can’t contribute to these accounts if you maintain any other full-time employees.
However, since you are both the employee and employer, a greater amount of your savings is tax-deferred. Furthermore, you can contribute more to a Solo 401(k) than other types of accounts such as SEPs and Simple IRAs. When options are limited, this is one of the best retirement accounts to get you closer to your retirement goals.
3. Traditional IRA
Traditional IRAs are retirement accounts that offer several tax advantages. Since you put in pre-tax dollars, your contributions are not considered taxable income. Any money you park in these accounts also continues to grow tax-free until you begin taking withdrawals.
These accounts give you incredible flexibility in how much and what kind of investments you can purchase. However, it does require you to manage your own retirement accounts and determine how you invest your money.
4. Roth IRA
When I asked which accounts best suited for my personal goals, my financial advised that I begin by setting up a Roth IRA. It is another retirement account that provides significant tax benefits and more flexibility in your retirement planning.
Since contributions come from after-tax dollars, you pay no taxes on your contributions or earnings once you begin taking withdrawals after retirement. Even if you take money before you are 59 1/2, there are no penalties or taxes if you take money from your original contributions. Unfortunately, you can only contribute $6,000 annually to these accounts.
While there are strict limits, Roth IRAs are a solid foundation to begin building your retirement savings on. Not only does this give you greater adaptability, but also more control over your money.
5. Life Insurance Plans with Cash Value
There are many types of life insurance available to you. In fact, your employer may offer life insurance benefits that have cash value. Investing in these accounts protects you against several kinds of potential risks as well.
Not only do Cash Value Life Insurance plans provide death benefits, but they also allow you to build its cash value that could help supplement your retirement accounts. Initially, your withdrawals first come from the premiums you paid, so they are not taxed. However, be careful not to let policies lapse because you could end owing a ton in taxes.
Life insurance plans are a good option for people who have already maxed out there annual contributions on other retirement accounts. It offers another way to build your nest egg and diversify your portfolio.
Why Should You Start Retirement Accounts
Although you will likely receive Social Security benefits after retirement, most financial advisors tell you not to rely on it as your sole source of income. Some analysts doubt there will even be any money left when millennials reach retirement age. However, one thing is certain. There are no guarantees that your benefits will cover all your expenses after retirement. So, it is important to start planning now and building your savings to fund your retirement.
There is no single correct approach to retirement planning. Your specific strategy will likely be determined why which types of accounts are available to you. As someone who is self-employed, I have fewer options and require more direct involvement. However, it is best to discuss your specific circumstances with a professional to determine the best course of action. Once you choose the best retirement accounts for your situation, max them out every year. Regular contributions can help you catch up and get you closer to your retirement goals.
While I will always regret not starting my retirement planning from an early age, it is never too late. The most important thing is to recognize that you can start saving now. The more time your money has to accrue compound interest, the more tax-advantaged funds you have to last you through your golden years.
- Should I invest in an IRA or 401(k)?
- How to Plan for Retirement When You Lost Your Savings
- Two Modern Ways to Establish a Retirement Fund
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
A often overlooked retirement account is a Treasury Bonds account. A safe way of saving for the future. As little as $25.00. The safe way too park your money long term..
Good point! Bonds are a great way to diversify as well.