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Financial Planning

How to Get the Most Out of Your IRA and 401k Contributions

If you are saving up for retirement, be sure to follow these tips to maximize your savings potential.

Planning for retirement and saving is an essential part of sound financial management. One of the most powerful tools for retirement savings is contributing to a401(k) plan. Salaried individuals should strive to get the most out of their 401(k) plan by matching their employer’s contributions. This will help them save up and secure their retired life. Also, be mindful of the tax benefits you can get for the contributions – you may find that you have a significant amount leftover to invest or save. Here, I will detail how to get the most out of your IRA and 401(k) contributions.

Making the Most of Your IRA and 401k

To achieve your short- and long-term financial goals, it is essential to plan your retirement account and 401(k) contributions well. Calculate the maximum amount you can contribute to the program. Then, invest any leftover savings into other avenues.

401(k) Match

Many employers design 401(k) plans for their employees. Sometimes, they also match their employees’ contributions to improving the 401(k) benefits. This is known as a 401(k) match.

It is best to contribute the maximum amount in your self-directed 401k monthly contribution in such cases. If your employer contributes equally, they will match your contribution, and you will end up earning the maximum interest that you can on your retirement account.

Those who are maxing out 401(k) and still have savings leftover to invest can do more to increase their retirement savings with various other investment vehicles. 

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts or IRAs allow individuals to direct a section of their pre-tax income toward tax-deferred investments. Individuals can contribute up to $6,000 to their self-directed IRA in a year. Of course, provided you earn at least this much. Individuals above 50 years of age can add another $1,000U to their yearly contribution. There are several different kinds of IRAs. The two most common are a Traditional and a Roth IRA. You should know the differences between a Traditional and Roth IRA.

This type of retirement account is great because of the types of investments you can hold. Other retirement accounts are not as flexible as an IRA when it comes to the assets you may invest in. Some of the investments you can hold in an IRA include stocks, bonds, mutual funds, real estate, and even annuities.

Traditional IRA

A Traditional individual retirement account is tax-deductible depending on your modified adjusted gross income. Traditional IRAs may have an income ceiling if a retirement plan at work covers you.

Roth IRA

Contributions to Roth IRAs are not tax-deductible immediately. Still, you may withdraw the funds in a Roth IRA tax-free (including gains, if any) on qualified distributions during your retirement years.

Open an Additional IRA

Sometimes, it is wise to open another IRA to get the benefits of both traditional and Roth IRA. For example, you will need to start taking minimum distributions from your traditional IRA once you are seventy-two. However, that is not the case with a Roth IRA. A benefit of this is that your money can stay invested longer. A combination of taxable and tax-free income can help you create a retirement plan that minimizes your tax bill.

Owning and investing in more than one IRA has a crucial catch – the annual limits on your contributions are cumulative between all the IRAs you fund. Therefore, you need to split your contributions anyway you want. As long as you stay within the annual limits and meet the income rules, you will be all set. It is advisable to remain informed about the terms and conditions of withdrawing money from IRA accounts.

Getting the Most Out of Your 401k

It is important that you get the most out of your IRA and 401k. Whether you contribute to a Traditional or Roth IRA, saving money for retirement is crucial. In addition to this, be sure you are taking full advantage of any possible 401k matches your employer is offering.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for his own blog of Self Directed Retirement Plans and as a guest blogger to many sites in the niche of finance. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com or visit www.sdretirementplans.com.

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