Best Retirement Account for 2015
Planning for retirement can be easier than you may think. The sooner you get started; the more financial security you can accrue. A way to get started is with this straightforward knowledge of these vital retirement accounts.
Individual Retirement Account
An Individual Retirement Account, IRA, allows you to contribute a specific amount each year investing these contributions tax deferred. You also do not pay taxes on the yearly investment gains allowing them to grow more rapidly. You do not pay the income taxes until you withdraw your money when you retire. You can deduct contributions you make to your IRA on your income tax return each year if you do not contribute to a 401K retirement account at work.
Since the IRA is an investment account, you can invest the money in it in bonds, stocks, ETFs, mutual funds and other types of investments. Buying and selling investments within the IRA is also possible. However, if you try to get cash before you’re 59 ½ years old, you will undoubtedly have to pay a ten percent penalty and also be answerable to local, state and federal taxes.
IRA accounts can be opened by you at a bank or brokerage house. You can open an account in person or online. Be sure to have your social security number available as well as the social security numbers of your beneficiaries.
2015 IRA updates include:
- For 2015, IRA contribution limits will remain at $5,500 for at least one more year. If you are 50 or older, your contribution for catching-up remains at $1,000 since it is not indexed for inflation.
- If you have a 401 (K) or other retirement plan at work, you are limited as to what you can deduct of your IRA contributions. For single filers earning between $61,000 and $71,000, IRA deductions are phased-out in 2015. For those filing jointly, the range of phase-out is $98,000 to $118,000. If your spouse is covered, but you are not, the phase-out range is $183,000 to 193,000 in 2015.
Contributions to a Roth IRA are made after you have paid taxes on the income. However, the money you generate from your investments is never again taxed. Additionally, you are able to withdraw money from your Roth IRA contributions before your retirement age without having to pay penalties. This allows you to invest your extra cash and give yourself an incredible tax break in the future.
A Roth IRA is an outstanding opportunity for retirement planning due to its tax-free growth potential. It is especially suitable to:
- Persons not able to receive employer 401 (K) matching contributions
- Persons who are able to save more than their employer’s matching contributions.
Roth IRA 2015 Update:
The limits for Roth IRA contributions will increase in 2015. If you earn too much money, you will not be allowed to contribute to a Roth IRA. The Roth contributions’ phase-out income range for a single person in 2015 will be between $116,000 and $131,000 with an increase of up to $2,000. For couples filing jointly, the phase-out income range will be $183,000 to $193,000 also with an increase of $2,000 over last year.
401 (K) Account
A 401 (K) is an employee benefit. This type is an account of your workplace. It provides you with an opportunity to contribute a before-tax portion of your paycheck and place it into this investment account that is tax deferred. You are not able to begin this type of account on your own since it has to be offered by your employer.
An advantage of this pre-tax contribution is the lowering of the income amount your taxes are based on. For instance, if you earn $100,000 and you contribute $10,000, you are taxed at that time only on a $90,000 income. In addition, your investment grows until you reach retirement.
Withdrawing money from this account before you reach retirement age will require you to pay a penalty of 10%. You could also be required to pay local, state and federal income taxes. To avoid the penalty and taxes, some employers provide 401 (K) loans.
The biggest benefit of the 401 (K) is the employer matching of your 401 (K) contributions. An employer’s matching contribution can, however, be “vested”. In other words, it is not always 100% yours immediately. It can be “vested” in one of the following ways:
- Immediate – With this type of vesting, you gain total ownership of your employer’s matching funds the moment it lands into your account.
- Cliff Vested – A cliff vesting employer matching contribution gives you 100% ownership after a specific period of service time. If you leave their employment before that period of time is over, you may lose the entire matching contribution. There is a limit of three years to this service requirement placed by federal law on qualified plans such as 401 (K) or 403 (b).
- Vesting Graded – With graded vesting, you gradually increase your ownership of your employer’s matching contributions as your service length of time increases with a final result of 100% ownership. Federal law places a six-year maximum time of service of graded vesting retirement plans.
Other 401 (K) Type Accounts:
- 403 (b) – Similar to a 401 (K), this type of account is available to educators and nonprofitmaking employees.
- 457 – These are available to employees of the government.
Other Types of Retirement Plans
- Roth 401 (K)
- Simple IRA – With this retirement plan, employees of small companies make pre-tax paycheck contributions withdrawals allowing the money to grow with its tax deferred until retirement.
- SEP IRA – This type account is only available if you are self-employed with no employees. With a SEP IRA, you can contribute a portion of your earnings to a retirement account of your own deducting them fully from your income taxes.
These are a full scope of investment possibilities for retirement. To begin retirement planning, a 401 (K) is a good starting point for tax-deferred growth, but a Roth IRA is also great for saving extra cash for retirement or special events.