With so many responsibilities in our day-to-day lives, it is common to feel unprepared for the future. If you have ever caught yourself staring at your 401(k) statement blankly or questioning whether a Roth IRA is the right move, you are not alone. With guidance, these accounts can feel less daunting and more like tools you can confidently use to secure your future.
401(k)
A 401(k) is like a retirement starter pack, especially if your employer offers a match (which is free money!). Contributions are taken out of your paycheck before taxes, which lowers your taxable income now, however you will pay taxes when you withdraw in retirement. It is a great choice because it is automatic – set it, forget it and watch savings grow. Be aware that if you withdraw early, you will face income taxes as well as a 10% penalty. This is your meant to be long-term, can’t-touch-it money.
- Example: If you are earning $50,000 a year and contribute 10% to your 401(k) with a 3% employer match, that is $6,500 saved annually. Over 30 years, assuming a 6% return, that could grow to over $500,000.
Roth IRA
Unlike the 401(k), you contribute to a Roth IRA with after-tax dollars, so you will not get an immediate tax break. The upside? When you take money out in retirement, it is tax-free. Roth IRAs offer flexibility; you can withdraw your contributions (not your earnings) at any time without penalties. This makes them a good option if you need some of that cash before retirement.
- Example: You are 40 years old and decide to start contributing the maximum amount to a Roth IRA (which in 2024 is $7,000 per year if you are under 50). If you contribute $7,000 annually for the next 25 years until you retire at age 65, and your investments grow at an average annual rate of 6%, you could end up with around $464,000.
Traditional IRA
The Traditional IRA is a solid option, especially if you are looking for a tax break now. Like the 401(k), contributions to a Traditional IRA may be tax-deductible, which can lower your taxable income in the year you contribute. However, withdrawals in retirement are taxed as ordinary income.
- Example: You contribute $6,500 annually to a Traditional IRA starting at 35, and you qualify for the tax deduction each year. By 65, with a 7% average annual return, your account could grow to about $650,000. Unlike the Roth IRA, these withdrawals will be taxed, so it is important to plan for that.
SEP IRA
If you are self-employed or run a small business, a Simplified Employee Pension (SEP) IRA might be your go-to. SEP IRAs allow you to contribute up to 25% of your net earnings from self-employment, or $66,000 in 2024, whichever is less. This high contribution limit can make SEP IRAs a powerful tool for ramping up your savings if your income changes year to year.
- Example: If your self-employment income allows you to contribute $15,000 annually to a SEP IRA from age 40 to 60, with a 6% return, you could accumulate around $555,000 by retirement at 65. Like a Traditional IRA, contributions are tax-deductible, providing valuable tax savings now, withdrawals in retirement will be taxed.
Next Steps
How do you choose? If you are eligible for a 401(k) with a match, start there. That is an instant return on your investment you do not want to miss out on. The best retirement account for you is the one you start funding now. It is okay if you do not have all the answers or much to contribute right away. Starting small and being consistent will get you far.
Get a Helping Hand
As the end of the year is approaching, it is the perfect opportunity to reassess your retirement goals and prioritize your financial well-being. SESLOC members can meet with a knowledgeable financial counselor from GreenPath Financial Wellness who will provide personalized guidance tailored to your unique circumstances. Additionally, SESLOC’s retirement calculators and budgeting tools are valuable resources to help you navigate your financial planning. Take the initiative now to ensure a secure and fulfilling future.
