You’ve just graduated, looking forward to a new job and the prospects of the future. And before you know it, the end of your career is in sight, and the prospect of retirement is no longer just an abstract concept.
According to the Employee Benefits Research Institute’s (ebri.org) 2023 Retirement Confidence Survey, 75% of retirees are at least somewhat confident they’ll have enough money to live comfortably in retirement. But workers aren’t as confident. Among those who aren’t confident, four in 10 workers and a quarter of retirees say it’s because they have little or no savings.
But there’s good news: retirement planning options are more flexible than ever before. Whether you’re saving through your company’s retirement plan or saving individually, tax-deferred retirement accounts offer the opportunity to save before and after taxes, earn tax-free gains on your investments, and generate taxable or tax-free retirement income, depending on your situation. What type of savings account to use?
Here’s a quick rundown of what’s available and how much you could potentially save each year:
Company Pension Plans – There are many types of company pension savings plans, some funded solely by the employer, some funded solely by the employee, and some with both employer and employee contributions. Both employer- and employee-sponsored plans, such as:
401(k), 403(b), or government 457(b) plans, have become popular plan types in recent years. Eligible employees can defer up to $23,000 from their 2024 salary. Participants age 50 or older can contribute up to an additional $7,500, for a total salary deferral of $30,500. Depending on the employer, salary accruals may be pre-tax or post-tax. Some plans also allow employees to make optional after-tax additional contributions. Employers may also, subject to the terms of the plan, match a portion of employee contributions to tax-exempt or certain Roth accounts or make other voluntary contributions to the plan (although they may not be required to do so).
SIMPLE IRA. Eligible employees can defer up to $16,000 from their 2024 pay. Those over age 50 have a catch-up contribution of up to $3,500, bringing the total payroll deferral to $20,500. Depending on the employer, payroll deferrals can be made as pre-tax or Roth contributions. Employers must make either matching or non-elective contributions to eligible participants, which may also be made as pre-tax or Roth contributions, depending on the terms of the plan. Starting this year, certain plans also offer expanded employee pay deferrals, increasing the amount from $16,000 to $17,600.
Individual Retirement Accounts – In addition to company retirement plans, there are also Individual Retirement Accounts (IRAs) that can help you save for retirement.
Traditional IRA. If you have income (and if you’re married, you have a spouse with income) you can contribute up to $7,000 or 100% of your earned income, whichever is less, in 2024. If you’re 50 or older, you can contribute an additional $1,000, for a total of $8,000. Contributions to a traditional IRA may or may not be tax deductible, depending on your tax status, whether you (and your spouse, if married) are in an employer retirement plan, and your modified adjusted gross income. For the annual limits to apply, contributions to a traditional IRA must be combined with contributions to a Roth IRA.
Roth IRA. If you have income (and if married, your spouse has income) and your modified adjusted gross income is within the IRS limits, you can claim up to $7,000 or 100% of your earned income, whichever is less, in 2024. To a Roth IRA. If you are age 50 or older, an additional $1,000 contribution is available for a total of $8,000. Contributions to a Roth IRA are never tax deductible and must be combined with a traditional IRA contribution to qualify for the annual limits.
Starting in 2025, there will be new features for retirement planning. Here are some changes you can look forward to:
Automatic login. For employers with 10 or more employees who have a retirement plan in place from 2022 onwards, new employees hired in 2025 will automatically be enrolled in the retirement plan and begin saving for retirement. Salary deferral contributions start at 3% and increase by 1% each year, at the employer’s discretion, until the deferral rate reaches 10%. They are automatically rolled into the plan, but employees can end the deferral at any time.
Extra catch-up contributions. If you’re part of an employer retirement plan, extra catch-up contributions are available for participants aged 60 to 63.
If you want to be more secure, take the time now to find out what you want your retirement to look like and which savings plan you should use. If you need help preparing for retirement, talk to a financial advisor about creating a plan that aligns with your goals and objectives.