New Year’s rituals, whether spiritual in nature or more tangible like making resolutions or setting goals, are meant to set us on the right path for the year ahead. We often vow to make positive changes or try something new and exciting. Saving money ranks as one of the top resolutions people make for the new year. And while that is an admirable and necessary goal, taking it one step further to include investing your money over the long-term can provide an opportunity for your money to grow faster and your returns to compound.
You save money for emergencies or purchases in a low-risk vehicle like a savings or money market account. It’s readily available but has minimal gains. When you invest your money, you take more risk, but there is also more potential for long-term rewards. Realizing retirement dreams is one of the top reasons people invest. Many financial experts agree that you may need up to 85% of pre-retirement income so let’s look at three of the most common retirement investment vehicles.
Employer Sponsored Plans, 401(k) or 403(b) – These plans make investing for retirement easy for an employee. Participating in these plans involves your employer taking a percentage of your choosing, say 5 or 10% out of your salary before your pay is taxed which helps lower your tax liability for the year. Most of these plans are portable allowing you to roll the funds into another employer’s 401(k) or 403(b) plan, or an IRA, when you leave the company or retire. Many employers will offer a partial or full match of your contribution up to a maximum amount of your salary. They can choose to offer a percentage, usually 3-6%, or a dollar amount such as the first $3000 or $5000 of your contributions. The maximum contribution that an employee can make for 401(k) and 403(b) plans in 2022 is $20,500. Taxpayers aged 50 and above can add an additional $6500 catch up amount for a total of $27,000.
Traditional IRA – Any individual 18 years or older with an earned income can open an Individual Retirement Account (IRA) and invest money, pre-tax, up to the IRS contribution limits for the year. Contributions may be tax deductible (speak with your adviser or accountant to see if you qualify) and earnings can potentially grow tax-deferred until you take them. This is beneficial as many retirees are in a lower tax bracket or live in a lower taxed state during their retirement years. Investing in an IRA may also provide you with a wider range of investment choices than an employer sponsored plan. The maximum contribution for IRAs in 2022 is $6,000 per individual and, if you are 50 or older you can contribute an additional $1,000 catch up amount.
Roth IRA – Similar to an IRA, funds invested in a Roth IRA can grow tax free, however you invest with after-tax dollars, and you can withdraw funds, tax, and penalty free, if certain conditions are met. Contribution limits for 2022 are the same as those for a Traditional IRA, however there are income limits when it comes to who can contribute to a Roth IRA. For 2022, if you are single and your Modified Adjusted Gross Income (MAGI) is less than $129,000 you can contribute to a Roth IRA. If married, your MAGI must be less than $204,000. Whether single or married, if you make slightly over the income limits, you may be able to contribute a reduced amount. We recommend discussing any IRA contributions with both your financial adviser and accountant.
Although these are the most common options, there are many different ways to invest for retirement as part of an overall financial plan. Start your new year on the right path and learn more about how to strategically invest to maximize your retirement income while minimizing your investment taxes. Call the Knox Grove team at 609-216-7440.