Top 5 Most Popular Ways To Fund Retirement
There is debate around the appropriate amount of funds needed to ensure a comfortable retirement, but there are a number of surefire ways to get the most out of your savings.
Author: Mark slater
February 13, 2018
One of the most important things to consider in life is saving for retirement. As experts vie for the appropriate amount of money required for the comfort of retirement, there are several ways you can plan to get the most out of your savings.
1 – Individual retirement accounts
Many people use Individual Retirement Accounts (IRA). These accounts allow taxpayers to get tax benefits for their money saved. The most popular types of IRAs are traditional, straightforward, and streamlined employee pensions and Roth IRAs. The difference between these accounts lies in their constitution, their contributions and their tax deferral. The financial products underlying IRAs include mutual funds, stocks and bonds.
IRAs are set up by the person looking to save for retirement. Traditional IRAs are accounts that are usually created with funds that have already been tax deferred. Taxpayers will receive a reduced tax debt on funds deposited into IRAs. However, they will be taxed when funds are released for retirement.
Likewise, Roth IRA accounts are also great for saving for retirement. However, unlike traditional IRAs, these accounts are not tax deductible. When the individual makes a payment to a Roth account, they do so with funds that have already been taxed. In order to prevent the taxpayer from getting a double whammy on taxes, they are simply not taxed upon withdrawal, thus leaving Roth IRAs tax-free upon payment.
Conversely, a Simplified Employee Pension (SEP) IRA is in place for independent contractors, small business owners and entrepreneurs. These are set up by the business owner for their employees (or for themselves), and the business owner is the contributor. Employees are not allowed to make contributions to this account as it is a small business tax deduction. When a small business sets this type of IRA for its employees, just like the traditional IRA for individuals, the tax deduction is visible on the IRS tax form. During retirement, when employees withdraw from their SEP IRA, they will be charged income taxes at the time of withdrawal.
Employee savings incentive matching plans – also known as SIMPLE IRAs – are similar to SEPs. However, this plan allows employees and business owners to make tax-deductible contributions to accounts until paid at retirement. During retirement, when the employee makes a withdrawal, he will then see his tax payable. They also help small businesses reduce their tax liability.
2 – Real estate investment
Many others choose to enter the real estate market to help have investments for retirement. Some people buy properties that can be resold, some have summer residences, while others move into rental properties. Rental properties can provide a steady stream of consistent income while facing retirement. Many taxpayers invest in a mutual fund or exchange-traded fund (ETF) through their 401k or IRA to help them financially access the real estate market, ensuring an even more secure investment for their retirement.
3 – 401,000 employer sponsored plans
Employer-sponsored plans offer incentives to both employer and employee. For the employee, the plan is a low cost benefit that provides a method for obtaining discounted service. The employer benefits from the tax deductibility of his contributions.
In addition, providing this service is a way to retain critical and high performing employees. The 401k and some forms of IRAs are types of employer-sponsored retirement savings plans in which employee contributions are matched by their employer.
4 – Brokerage accounts
IRAs and 401ks are attractive because of the tax deferral and investment possibilities. A brokerage account is an alternative to these plans, but it does not offer tax deferral. It compensates for this with the investment opportunities it offers.
There are a myriad of investment opportunities, including individual stocks and bonds, mutual funds, ETFs, real estate investment trusts, certificates of deposits, and money market funds. Among these options are more aggressive investment choices. The most aggressive options are stocks, mutual funds, and ETFs. The attraction of the latter is that the possibility of earning more is greater than with a savings account or a checking account.
Bonds, certificates of deposit and money market funds are the least risky options. Nonetheless, these options offer peace of mind, long term stability, as opposed to the short term volatile nature of stocks, for example.
A final benefit of a brokerage account is the 20% lower tax rate (compared to regular income taxes) on long-term capital gains.
5 – Tax-deferred annuities
These types of annuities offer an alternative route to achieving a retirement goal. These annuities are characterized by tax deferral and various investment opportunities. They are offered to both individuals and married people through insurance companies. There are three interest rates available which can be chosen: fixed, indexed (i.e. determined by the points of a specific index) and variable (linked to market performance).
Any money deposited into an annuity accumulates tax-free, but becomes taxable once the funds are withdrawn at retirement. An added benefit of annuities is that they can provide a secure income to the investor for a fixed period of time, or even a lifetime.
Annuities are not the best choice for every investor: they are only supported by the ability and reliability of the originating insurance company to pay claims. The result of his investment in annuities cannot be guaranteed.
Nonetheless, it should be noted that if you find yourself in a financial emergency, do your best to avoid withdrawing from any of your investments. Auto title loans are an option available to quickly receive the money you need.
There is a long history of insurance agents selling annuities to simply manipulate investors into receiving generous commissions. Often, agents do not care about the real benefits to the investor. These annuities are generally more expensive than the options described above. It is not uncommon to see annuities with annual costs well above 4% per annum.
Mark Slater is Director of External Relations at Midwest Title Loans