How to Choose Between an IRA and a 401(k)

No matter where you are in your career, it is never too early to plan for retirement. If you’ve been avoiding setting up a retirement savings plan because you don’t know where to start, you’re not alone. The two main types of retirement savings plans are a 401(k) and an IRA—but how do you know which one is best for you? Determining which kind of retirement savings plan is right for you will depend on which option fits your specific lifestyle. Here, we will look at a few of the key differences between the two and when it’s advisable to invest in an IRA or a 401(k).

What is a 401(k)?

A 401(k) is a retirement savings plan through your employer. Contributions are normally deducted straight from your paycheck into your 401(k). The money put into your 401(k) will grow over time as it is invested on your behalf into mutual funds, stocks, and bonds. You can contribute up to $19,000 a year to a 401(k) and there are no income restrictions. Money in your 401(k) cannot be taken out until you reach age 59 ½ without a 10% penalty, but after you are 70 ½ you must take minimum distributions. Your contributions are tax-deductible, but you will pay income taxes on money you withdraw from your 401(k).

There are a few ways to tell if a 401(k) is a good retirement investment for you:

– Your employer offers a 401(k) and will match your contributions, essentially giving you free money.

– Automatic paycheck deductions will make you less tempted to spend the money. It is gone before you ever have it in your hands.

– You have reached your IRA’s maximum annual contribution. You could use a 401(k) to maximize your savings.

– You want to take advantage of the tax benefits of a 401(k). Because the contributions to your 401(k) are taken out of your paycheck before taxes, you could reduce your taxable income and therefore fall into a lower tax bracket. This could allow you to receive higher income tax returns.

What is an IRA?

An IRA, or individual retirement account, is the other most popular retirement savings plan. An IRA is not through your employer and will therefore stay with you no matter how much your lifestyle changes. You can invest up to $6,000 per year until you are 50, at which point you can invest $7,000 per year. Like a 401(k), you cannot withdraw money before age 59 ½ without paying a 10% penalty and you must make minimum withdrawals after you are 70 ½.

Your IRA contributions may be tax deductible depending on your financial situation, but any withdrawals will be taxed as income. However, this is different if you have a Roth IRA. With a Roth IRA, you pay taxes up front on your contributions, but you do not have to pay taxes when you withdraw later. There are no income limits with a Roth IRA and because you pay taxes up front, you can withdraw your funds at any time without paying a penalty. There is also no mandatory minimum distribution requirement at a certain age, so you do not have to touch your contributions until you are ready.

A traditional IRA or Roth IRA may be right for you if:

– Your employer doesn’t offer a 401(k) match or any other retirement plans. IRAs allow you to save and invest on your own terms, even if you don’t have access to a retirement savings plan through your employer.

-You change jobs a lot or don’t plan to stay with your current employer. An IRA stays with you no matter where you go or who you work for.

-You are in a lower tax bracket. Especially if you are young, you can invest what you can in a Roth IRA now while paying the lowest possible taxes.

-You want to control how your money is invested. Whereas with a 401(k) you are paying someone to make investments for you, IRAs give you control over what kind of investments your money goes to.

The Takeaway

At the end of the day, the most important thing is that you pick a plan and start saving consistently. When you are looking at your options, don’t be afraid to compare different plans and services provided. There are so many variables that go into saving for retirement and it can be hard not to become stagnant with worry about the what-ifs. Focus on what you can control: making steady contributions to a retirement savings account that fits your lifestyle.

5 Tips for Talking to Your Parents About Retirement

retirement

Many adult children eventually find themselves switching roles with their aging parents. Whereas you were once the child in need of guidance, your parents gradually seem to need your help more and more. Suddenly, you realize that you’re the one with concerns about your parents’ health and finances. If you are concerned about your parents’ retirement plans – you’re not alone. Studies show that approximately 26% of Americans ages 50 to 64 don’t have any kind of retirement savings. If your parents are facing retirement with no plan, it’s not too late to intervene. Here are some tips for opening a dialogue with them about retirement options.

1. Be Honest, But Gentle

Ambushing your parents with a bunch of questions is definitely not the best way to start a healthy conversation. Be direct, but give them time to prepare for your chat. Tell them you are worried about their retirement plans and ask when would be a good time to talk. Start by getting an idea of whether or not your parent shares your concerns. If they do, these concerns will be a good place to start a conversation. If not, get prepared to make your argument as respectfully as possible.

2. Don’t Lecture; Ask Questions

The important thing to keep in mind is that this is a two-way conversation. Lecturing your parent about what he/she should or shouldn’t be doing is not likely to lead to anything productive. Ask your parent lots of questions. Do they have any savings? What do they expect their retirement expenses to be? Do they have any debt? These questions can open a dialogue and give you a better understanding of how prepared they are for retirement. Ask to see documents if they have them and go over the information together so you both know all the details.

3. Be Realistic About Your Ability to Help

Some parents assume their adult children will be able to care for them in their later years. Be honest about your ability to help them in the future. If you are not prepared to provide housing, care, or financial assistance, now is the time to make them aware of this. Keep in mind that helping a retired parent doesn’t have to involve fully supporting them forever. Even putting some of your money aside into an emergency fund for your parent(s) could be quite helpful.

4. Let Them Make Their Own Choices

Ultimately, the retirement choices your parents make are theirs and theirs alone. As much as you may want to intervene and do what you think is best, you have to respect the fact that these decisions are theirs to make. You can provide them with as much information as you possibly can to help them make an informed decision about their financial future, but you cannot dictate their choices. Be patient and understanding.

5. Keep the Conversation Going

Talking to your parents about their retirement plans is not a once and done deal. This is likely a lifelong conversation that you will need to have repeatedly as your parents get older and their financial circumstances continually change. Creating an open dialogue will make both of you feel more comfortable voicing your concerns when they come up over the years. Check in with your parents every once in a while to ensure that they are still on track with their retirement goals.

Where your parents are at financially when they retire is the result of decades worth of financial decisions and life choices. There is no way for you to turn back the clock and reverse everything for them. However, starting a dialogue now about money and retirement can help your parents prepare for life in their golden years.

How to Avoid Bankruptcy in Retirement

bankruptcy in retirement

Bankruptcy filings for retirees are rapidly increasing across the US. As poorly funded pensions and retirement savings shrink, retirees look to bankruptcy to put a stay on some of their monthly payments. Rising healthcare costs, adult children living at home for longer, and the financial inability to properly save for a retirement that extends into longer lifespans have all contributed to the rising senior bankruptcy rate. How can you avoid this trend and spend your golden years in peace? Here we look at a few ways to make sure you aren’t filing for bankruptcy after retirement.

1. Settle Your Debts

Regardless of how much you have invested into your retirement, if you’re carrying a mountain of debt into retirement you could end up financially strapped pretty quickly. Paying off as much debt as possible before retirement should be your number one goal. High interest credit cards are the most important to pay off, followed by your mortgage and car payment. The less debt you carry into retirement, the more money you will have to cover your living expenses. If you are struggling to tackle your debt and you are approaching retirement, sit down with a debt negotiation attorney to figure out what your options are.

2. Be Clear with Children and Other Family Members

It is very tempting to be generous with family members and other loved ones. However, you need to be realistic about when you can actually afford to help and how much this will impact your retirement savings plans. Parents should not feel obligated to pay for college, a wedding, or other big life events if they do not have the means to do so. The best thing to do is communicate these financial boundaries early. Adding more debt to your plate in order to help a family member can be disastrous for seniors looking at retirement. After all, if you do not prioritize your financial health over that of your loved ones, you could end up becoming a financial burden to them later on.

3. Downsize

Retirement comes with a lot of big life changes. More leisure time, the freedom to travel, and the ability to explore new hobbies come hand-in-hand with some harder lifestyle changes. With the inevitable reduction of income in retirement, retirees often find they cannot afford to keep up with their day-to-day expenses. Buying a smaller home or renting and downsizing to one vehicle instead of two or three can help you establish a leaner budget before retirement. This should make it easier to embrace a reduced retirement income.

4. Be Smart About Social Security Benefits

The biggest concern most people have about retirement savings is running out of money. Getting a part-time job to boost your retirement portfolio can help buoy your finances in retirement. Most retirees need about 80% of their pre-retirement income to maintain their lifestyle. Your Social Security benefits will mirror the average of your pre-retirement wages. It is important to keep in mind that your social security benefits will likely not cover even half of your retirement expenses. The longer you can go without tapping into social security, the better your financial situation will be in retirement. Even if you have the option to start using your Social Security, only do so when it is absolutely necessary.

5. Invest!

The shakiness of the market over the last two decades has many Americans making uber conservative investment decisions about their retirement. Investing doesn’t have to be scary. In order to keep up with cost of living adjustments and to give yourself a generous nest egg to work with in retirement, it is important to invest savings into a diversified portfolio of common stocks. Especially if you are a few decades away from retirement, it is a good idea to use the time you have to put your assets into money market funds. Investing your money, as opposed to letting it sit in a bank, can make all the difference for your funds in retirement.

Many seniors and those approaching retirement age have anxieties about the financial realities of retirement. Veitengruber Law can provide the services you need to establish a robust retirement plan. From asset protection and debt management to bankruptcy litigation, we can help you get the peace of mind you need. We also work with a diverse network of professionals who can help you invest, downsize, and make a comprehensive retirement plan that will be effective. Don’t wait until you are enjoying your golden years to have second thoughts about your retirement plan. Take action today to secure your financial future.