Many look forward to the days of freedom from work, while others dread the financial responsibility that retirement demands. With the right planning, you can enjoy the days of retirement.
With our ever-changing economy, take proactive steps to provide additional financial independence for your retirement years. By starting to save early, you can get a head start on preparing for retirement. The younger you start saving, the more time your money has to grow.
Check out our Estimate Social Security Benefits Calculator to estimate your Social Security income upon retirement.
Participate in a 401(k) Program
Many companies offer a 401(k) program as a benefit of employment. A 401(k) program is beneficial, as it offers a variety of tax benefits. Please consult a tax advisor for additional information specific to these benefits:
- Contributions may lower taxable income since they are removed from your paycheck before taxes are withheld.
- Contributions are tax deferred, meaning you do not pay taxes on annual gains or other distributions of the account. Instead, taxes will be paid once withdrawing funds.
- Contributions may be tax deductible, but please consult a tax advisor for additional information.
- Some employers offer a contribution match to those participating in a 401(k) program.
- Keep in mind that you will be assessed a 10% penalty for early withdrawal fee of funds in your 401(k). Please consult your tax advisor for additional information.
Check with your employer to see if a 401(k) is offered. Also, use our 401(k) Calculator to see how much you can save with your 401(k) program.
Retirement Fund Options When Switching Jobs
When switching jobs, you have three options for your 401(k) Retirement account:
- Cash Out. You can choose to cash out your 401(k) account. Note that you will have to pay income taxes on the withdrawn funds, as well as a 10% early withdrawal fee. Please consult your tax advisor for additional details.
- Move Funds. You can move your 401(k) funds to your new employer or rollover IRA. If you decide to move your funds to your new employer, consider a trustee-to-trustee move, meaning that you never touch the money. Instead, the new employer requests the transfer of funds from the old employer. Another option for moving your money is called rollover. Upon this action, your old employer gives you a check for the amount of your 401(k) funds minus 20% for income taxes purposes. This 20% withholding will be returned the next time you file income taxes. However, it is important to note that you are required to deposit the full amount of your 401(k) within 60 days before a penalty is incurred. If you miss the deadline, you have to pay the missing 20%.
- Leave As Is. You can leave your 401(k) money as is. Your old employer is required to allow you to do this if you have more than $5,000 in the plan.
Investing in an IRA
If you would like to contribute more to your retirement savings or your employer does not offer a 401(k) program, you might consider opening an IRA. An IRA stands for an Individual Retirement Account and is specifically designed for retirement savings. Ameris Bank offers two types of IRAs, the Traditional IRA and the Roth IRA.
Traditional IRA: A Traditional IRA is similar to a 401(k) in that it is tax-deferred, meaning that you only pay taxes on the funds once the money is withdrawn. This can be beneficial as it provides a higher balance of funds for exponentially compounding interest. Contributions may be tax deductible if you qualify, but please consult a tax advisor for additional details and information.
Roth IRA: A Roth IRA differs from a Traditional IRA in that it is not tax-deferred, meaning that you do not have to pay taxes once the funds have been withdrawn. This type of account is beneficial if you expect to be in a higher tax bracket when withdrawing the funds. Roth IRA guidelines do not require individuals to make mandatory withdrawals once they turn 70 ½, as a Traditional IRA does.
For more detailed information on IRAs and for eligibility guidelines, be sure to contact a financial advisor. Also, check out our Spend it or Invest in an IRA? Calculator to determine if investing in an IRA would be beneficial for you.
Other Investment Products
In addition to a 401(k) program and an IRA, you may also consider diversifying your portfolio by investing in stocks or bonds. By definition, stocks are typically known for being high risk investments, but long-term, stocks have the ability to produce high returns. Bonds, by definition, are a more stable form of investing but typically, do not bring in as high returns as stocks.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategy, if any, may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.
Reviewed July 2023