5 Sources of Income in Retirement
You’ve probably heard the saying, “It’s never too early to start preparing for retirement,” and it’s true. The sooner you start investing, the sooner you’ll be able to work on saving money to create the retirement of your dreams. However, in order to do that, you’ll want to start investing right now. Here are some simple ways to get going.
Traditional 401(k) and Roth 401(k)
If you’re employed, then chances are your employer offers some kind of 401(k) plan. These investment vehicles are used to help you put away part of your paycheck with the added benefit of having your boss pitch in too. While a traditional 401(k) is what companies typically offer, you may also have the option to invest in a Roth 401(k).
The difference between these two investments is that you’ll receive tax deductions from your 401(k) contributions now, but you’ll pay taxes on withdrawals. With a Roth, you don’t get upfront deductions, but the money is yours in retirement.
While rarer than 401(k)s, some companies still offer their employees pensions. Unfortunately, you’ll experience some form of taxes when you take distributions. This is because many pensions are funded with pre-tax money, so investors pay the taxes on the backend. However, you may be able to get some kind of break if you funded a portion with after-tax dollars. You’ll have to check with the person in charge of your plan to know whether or not this is an option for you. If it’s not, be sure you’ve budgeted for your taxes in retirement.
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IRAs, or Independent Retirement Accounts, are very similar to 401(k)s except that you’re the only one who contributes to them, not an employer. For this reason, they’re popular with people who don’t have a 401(k) match, don’t like their 401(k) package, or want something in addition to their 401(k).
Unlike many investments, IRAs are simple. You can contribute up to $5,500 each year until you’re 50; after that, you can contribute an extra $1,000, for a total of $6,500. This extra amount is called a “catch-up” contribution and is designed to help those who are closer to retirement age. There’s one main difference between the two main forms of IRAs: the traditional IRA will be taxed in retirement, but the Roth IRA will not. The reasoning behind this is the same as that of the traditional and Roth 401(k) plans.
If you’ve been an employee in the United States, then you’ve been contributing to the Social Security system. This is designed to ensure that retirees receive some kind of monthly compensation in retirement. The catch is that Social Security isn’t usually enough to live on, so retirees need other investments, too. And there’s always the chance that you’ll have to pay high taxes on your Social Security, depending on your income.
If you’ve invested in other areas like real estate, stocks, or commodities, you’re likely going to have to pay taxes on your gains. This is one of those times when it may literally pay off to sit down with a financial planner and figure out how to save as much as you can on taxes, while still living the life you want.
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