On the seventh day of the “Eight Days of Income Protection” we bring you seven smart ways to save for your future, six things you didn’t know about long-term care insurance, five tools to create a personal budget, four steps to ensure financial security and income protection, three ways to get budget friendly long-term disability insurance, two tips for teaching kids about money, and one coverage we all need.
It’s never too early to start thinking about your financial security. Today, we bring you seven savings plans to help you plan for the future.
A 401(k) Plan, the Workplace Retirement Account
401(k) plans, are typically offered as part of your employee benefits. This workplace retirement account allows you to contribute a portion of your pre-tax paycheck in a tax-differed investment account. Many employers match employee contributions to a 401(k) plan.
Pre-tax money contributions are good ways to save because they lower the amount of income on which your taxes are based. For example, if you earn $65,000 and contribute $10,000, you are taxed on a $55,000 income.
The money in 401(k) plans grow tax deferred until retirement. If you withdraw funds from the plan before retirement age (59 1/2 years), you could be faced with a 10 percent penalty as well as state or local income taxes.
Roth IRA Allows Your Money to Grow Tax Free
A Roth IRA is an individual retirement savings account that allows your money to grow tax-free. You put your after-tax dollars in a Roth IRA, which means you’ve already paid taxes on the money you put into it. Since every penny in your Roth IRA is your own, your money grows tax free, and when you withdraw at retirement, you pay no taxes. You get to keep the entire amount.
You can contribute to a Roth IRA at any age as long as you have earned income from a job. Find out the maximum amount of Roth IRA contribution limits you can make for 2016 here.
Roth 401(k) Combines the Features of Roth IRA and 401(k) Plans
Roth 401(k) plans are ideal ways to save as they combine features of the Roth IRA and a 401(k).
Like contributions to a Roth IRA, contributions to a Roth 401(k) are not tax-deductible. Basically, you use after-tax dollars to fund your contribution. However, when you withdraw the money during retirement, the entire account is tax-free. On the other hand, regular IRA and 401(k) plans are tax-deferred which mean you’ll pay taxes on your distributions during retirement.
SEP Plans for Any Size Business
Simplified Employee Pension (SEP) plans are easy ways to save for any size business. A SEP plan can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Any employer can establish a SEP plan, including sole proprietorships, partnerships, and unincorporated businesses.
SEP plans are easy to set up and operate, have low administrative costs, and can provide large tax benefits. If cash flow is an issue, SEP plans offer flexible annual contributions. However, employers must contribute equally for all eligible employees. Contributions an employer can make to an employee’s SEP plan cannot exceed the lesser of 25 percent of the employee’s compensation or $53,000 for 2016.
SIMPLE Plans Are Ideal for Small Business Owners
Savings incentive match plans for employees (SIMPLE), are ideal ways to save money for small business owners. Available only to companies with 100 or fewer employers who don’t already offer a pension plan, SIMPLE plans are cheaper to establish and easier to administer than a traditional 401(k). SIMPLE plans work well for small businesses who want ways to save not only for themselves but also offer some retirement help to employees.
To be eligible for a SIMPLE plan, employers are required to:
- Contribute two percent of all eligible employees’ gross wages, regardless of whether they make deferral contributions; or
- Make dollar-for-dollar matching contributions, up to three percent of the employee’s compensation, on behalf of eligible employees who make elective deferral contributions.
Find out more about 2016 SIMPLE IRA contribution limits here.
Health Savings Plans Are Smart Ways to Save Money
Health savings accounts were created to help individuals save for future health expenses and control health care costs.
Health savings accounts (HSAs) combine high deductible health insurance with a tax advantaged savings account.
Basically, HSAs are like personal savings accounts specifically for healthcare costs. You can only use the money in them to pay for your deductibles or health care expenses. You can withdraw money from your account to pay allowable medical expenses, including copays and items such as contact lenses or prescription glasses.
If you don’t spend the money, you can roll it over indefinitely. At age 65, you can withdraw money for any reason whatsoever without penalty, but you have to pay income taxes on your withdrawal amount. However, you can use the amount for retiree medical expenses tax-free.
If you withdraw the money before you turn 65 for any reason besides medical expenses, you have to pay taxes and a 20 percent penalty. If you don’t need the money for medical expenses, you can invest it as you would other retirement savings.
529 College Plans
529 college plans are great ways to save for university or college. These plans offers tax advantages and other incentives to make it easier to save for college for a designated beneficiary such as a child or grandchild.
Generally, you put your after-tax money into the plan. You’re then allowed to withdraw the funds as well as any investment gains tax-free for use toward qualified education expenses, such as college tuition and books.
If your child doesn’t end up going to college, you may face fees and tax penalties when you withdraw the funds. However, you can often transfer the account to another beneficiary.
529 plans can vary from state to state. Each state’s plan offers various investment options, annual fees, and operating costs. Therefore, make sure to understand your state’s plans details properly before making the investment.
Above we’ve provided you with seven ways to save for your future. Make sure to do your research and consult with a knowledgeable financial advisor to understand which of these investments vehicles might be the right choice for you.