Imagine where you’ll be when you retire. Will you be sitting on a sunny porch, sipping a fruity drink and soaking in the sun? Or will you be roaming the world, investigating every off-the-beaten path place you can find, and sampling local delicacies? Or maybe practicing your golf swing or keeping up with your grandkids?
People have all sorts of ideas of what they’d like to do in retirement. But, to be able to put the working world aside and focus on these goals, you’ve got to have money in the bank. Planning for retirement means starting to save now, not later or someday.
How can you put aside enough cash to fund your post-retirement lifestyle? From the traditional to the DIY, we’ve got a handful of options for you to discuss with your family or financial planner.
The traditional route: 401(k) and 403(b)
So, what is a 401(k) or 403(b) plan? It’s important to understand what these are before running through the comparisons. With either of these options, companies put cash aside for you before you receive your paycheck. This money is “pre-tax” and many companies offer different types of matching options.
A 401(k) is usually used in the for-profit sector, while 403(b) accounts are typically found in the nonprofit world, and often used by teachers.
In 2015, the maximum pre-tax amount you can place in one of these accounts is $18,000 (which increases to $24,000 if you’re 50 or older).
But what if you work for a company that doesn’t offer retirement plans as a part of your benefits package? What if you’re self-employed, and the only benefits you get are the ones you pay full-price for?
You’re not out of luck. You just have to choose the retirement planning alternative that’s right for you.
Retirement saving alternatives
Here are a few alternatives to 401(k) plans to help you save for retirement. Of course, consult with a financial advisor before deciding what works best for you. Details and deposit limits change often, so be sure to have the most up-to-date information when you make your decisions.
This list just shares some of the highlights, so be sure to use resources such as the IRS to find the most up to date information and determine your best options.
If you’re a sole proprietor, this option lets you make both the employee and employer contributions to your 401(k) plan pre-tax. And the limits are much higher with this option than with a traditional 401(k), allowing you to put aside $53,000 per year in 2015 — or $59,000 if you’re 50 or older.
An IRA lets you deposit up to $5,500 a year ($6,500 if you’re 50 or older), and the cash grows tax-free. However, the rules get a little more complicated if you also have an employer-sponsored retirement plan.
If you earn over $71,000 annually (or $118,000 for a married couple) and have a work-based retirement plan, these contributions are generally not tax deductible. If you earn more than $61,000 (single) or $98,000 (married), you may be able to receive a partial deduction.
This option is generally used by people who work for themselves or have a small business, and the acronym stands for “simplified employee pension.” you can contribute up to $53,000 of your income or 25 percent of your earnings, whichever amount is smaller. But be aware that this option may require you to make contributions for your employees, if you have them.
This is a very popular option for freelancers. You put money in your Roth IRA after you pay taxes on it — and then you don’t have to pay any taxes when you withdraw your money after the age of 59.5.
If you want to withdraw money earlier than your 60th birthday, you can withdraw the amount of your original contribution (but not the extra money earned) without taxes or penalties.
Not everyone can use a Roth IRA, though. You must earn less than $131,000 if you’re single ($193,000 for married couples). If you earn over $116,000 (single) and $183,000 (married), then you can only contribute a reduced amount each year. While you can have both a traditional IRA and a Roth IRA, the contribution limits apply to all of your IRA accounts together.