Making sure you have enough money to retire on requires a great deal of planning and can take years of work. There are several vehicles that can make this easier, including a 401(k), an IRA and an HSA savings account. In addition, it’s a good idea to wipe out as much debt as possible before retirement.
A 401(k) retirement vehicle is generally a benefit offered by your employer. In addition to being able to invest your own money in a mix of stocks or bonds, your employer may offer a partial match by percentage. Make sure you put away enough money to take full advantage of the match. For example, if your employer matches at 25 percent up to 10 percent of your income, be certain to put aside the full 10 percent of your income to gain full benefit from the match. These funds are generally tax-deferred, which means you don’t pay income taxes on the money you save until you withdraw it. According to Efile.com, you can withdraw this money without penalty when you turn 59 ½.
Like a 401(k), a traditional Individual Retirement Account can be funded with pre-tax dollars. Roth IRAs are funded with after-tax dollars and qualified withdrawals are tax-free. Depending on how much your income is at the time of retirement, the taxation rates may not be important to you but if you own a business and plan to sell it before you retire, a Roth IRA can help reduce your tax burden. According to Manley Capital Management, if you retire early and want to withdraw savings, you will generally have to pay an early withdrawal penalty.
Your Health Savings Account will probably be coupled with a high-deductible insurance plan or HDHP. The benefit of an HSA and an HDHP in combination is that you can be certain that your medical expenses will be fully covered. In addition, your HSA deductions are pre-tax, reducing the amount of your income that’s subject to federal and state income tax rates. If you don’t need your HSA funds for medical expenses, according to Sapling, you can convert them to retirement savings when you reach the age of 65 or even pull part of the funds for non-medical expenses. Be aware that there will be taxes to pay on these dollars and depending on your age, there may be a penalty.
The thing to remember when using any retirement vehicle is that you may face a penalty for early withdrawals. These funds should be considered untouchable until you turn 59 ½ to avoid these penalties. Just make sure you plan well in advance and you should be good to go for your retirement.
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