How much money you should put in 401 (k)
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When we talk about personal finance, digital guidelines traditionally tend to shape our financial habits.
We often hear about having three to six months of living expenses in an emergency fund, or sticking to the 50/30/20 budget rule (spending 50% of our take home pay on needs, 30% on wants and 20 % in debt repayment and savings).
The amount you collect for retirement is no different. In fact, most financial experts suggest investing 15% of your income annually in a retirement account (including any employer contribution).
With 401 (k) s, or employer sponsored retirement plans, you may find that your company offers a match if you contribute a certain amount. For example, if your business is up to 6% of your salary and you contribute 6%, you double what you can set aside.
While the more you can contribute, the better, Shannon Lynch, CFP at Personal Capital, says it’s generally good to contribute at least enough to get your employer full if you have one. A business match is extra money from your employer that goes into your 401 (k), so you want to do everything you can to take advantage of it. Otherwise, it is “free” money that you are leaving on the table.
What if you cannot meet your correspondent employer?
If you are not yet able to contribute enough to match your employer, and therefore not enough to achieve the desired savings rate of 15%, aim to increase your pension contributions by 1 to 2% each year. If you choose to do this, some companies will automatically increase your premium rate each year, so it’s worth making sure you’re enrolled in what’s called a “self-escalation” feature.
Ivory Johnson, CFP and Founder of Delancey Wealth Management, recommends increasing your contribution rate as you get salary increases until you hit the maximum. There is a limit to how much you can contribute to your 401 (k) annually. In 2021, the standard annual contribution limit is $ 19,500 for 401 (k) plans. And people over 50 can use catch-up contributions to add an additional $ 6,500 to their 401 (k) account. Employer contributions are not taken into account within these specific limits.
Lynch reminds retirement savers to be strategic with the magic number they would like to contribute to their 401 (k) before automatically trying to maximize it, however.
“There may be situations where you may need to prioritize your cash savings to your emergency fund or save for some other reason, such as a down payment on a property or vehicle,” she adds. “$ 19,500 is not a small part of the change. “
Keep in mind that even if you don’t pay income tax on the money you set aside in a 401 (k), you will have to pay taxes later when you eventually withdraw the funds during your years of non-activity.
Where to invest if you don’t have 401 (k)
Don’t worry if your employer doesn’t offer 401 (k); there are still ways to save for retirement on your own.
Many large banks and brokerage firms offer individual retirement accounts, or IRAs, which allow you to put your retirement money in a range of investments, such as individual stocks, bonds, index funds, mutual funds. placement and CDs. Just like with a 401 (k), you can set up automatic contributions to your IRA from a checking or savings account.
When shopping for an IRA, choose an account that has no minimum deposit, offers commission-free transactions, and offers a variety of investment options. Taking these factors into account, Select has narrowed down our favorites for each type of retirement savings. (See our methodology for more information on how we choose the best traditional IRAs.)
As of 2021, the standard annual contribution limit is $ 6,000 for IRAs. People over 50 can use catch-up contributions to add an additional $ 1,000 to their IRA. Similar to a 401 (k), a traditional IRA can lower your taxable income, meaning you owe the government a little less each year you contribute.
If you are a young investor or plan to have more income and a higher tax rate when you retire, consider a Roth IRA rather than a traditional IRA. With Roth IRA, you pay taxes up front by contributing after-tax dollars, and later in retirement, your withdrawals are tax-free (as long as your account has been open for at least five years).
To determine which Individual Retirement Accounts (IRA) are best for investors, Select analyzed and compared traditional IRAs offered by national banks, investment firms, online brokers, and robo-advisers. We’ve refined our ranking by considering only those that offer commission-free equity and ETF trading, as well as a variety of investment options so you can best maximize your retirement savings.
We also compared each IRA on the following characteristics:
- Minimum deposit of $ 0: Not all IRAs in our ranking have minimum deposit requirements.
- Low fees: We have factored in the costs of each IRA, commission trading fees, and transaction fees.
- Bonus offered: Some IRAs offer promotions for new account users.
- Variety of investment options: The more diverse your portfolio, the better. We’ve made sure our top picks offer investments in stocks, bonds, mutual discoveries, CDs, and ETFs. Most also offer options trading.
- A pole of educational resources: We have opted for the IRA with an online resource center or advice center to help you educate yourself about retirement accounts and investments.
- Ease of use: Whether you access your IRA through your laptop at home or on your smartphone while on the go, it’s important to have a straightforward user experience. We have noticed that the investment platform excels in terms of usability.
- Customer service: Each IRA on our list provides customer service that is available by phone, email, or secure online messaging.
After reviewing the features above, we’ve sorted our recommendations based on the type of investor that’s best suited for, from newbie and lay investors to the more seasoned and seasoned investors.
Your earnings in an IRA depend on the associated fees, contributions you make to your account, and market fluctuations.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.