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Best Retirement Funds For Young Adults
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If you have young children or are still building your career, retirement may not be a top priority at this point in your life. But one day, if you’re lucky and save regularly, it will be.
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To make sure you have a financially secure retirement, it’s wise to create a plan early in life—or now, if you haven’t already. For example, by diverting a portion of your salary to a tax-advantaged retirement savings plan, your wealth can grow exponentially, helping you achieve peace in those so-called golden years.
But only two-thirds of current employees can easily understand what retirement benefits are available to them, according to a 2020 Employee Benefits Research Institute survey.
“One company’s benefit formula may not be as generous as another’s,” explains David Littell, a retirement planning expert and professor emeritus of taxation at the American College of Financial Services. “It is really important that you read the summary plan description that is provided to all participants in order to understand the design of the plan.”
Once you understand your retirement plan options, you’ll be better prepared to maximize your benefits and achieve the retirement you want.
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Almost all pension plans offer a tax advantage, whether it is available upfront during the savings phase or at withdrawal. For example, traditional 401(k) contributions are made with pre-tax dollars, reducing your taxable income. In contrast, Roth 401(k) plans are funded with after-tax dollars, but withdrawals are tax-free. (Here are other key differences between the two.)
Some retirement savings plans also include matching contributions from your employer, such as 401(k) or 403(b) plans, while others do not. When deciding whether to invest in a 401(k) at work or an Individual Retirement Account (IRA), use the 401(k) if you can get a company match — or do both if you can afford it.
If you’re automatically enrolled in your company’s 401(k) plan, make sure you’re taking full advantage of the company match, if available.
And consider increasing your annual contribution, as many plans start you off at a small level of deferral that isn’t enough to provide you with retirement security. About half of 401(k) plans that offer automatic enrollment use a default savings deferral rate of just 3 percent, according to Vanguard. But T. Rowe Price says you should “aim to save at least 15 percent of your income each year.”
Types Of Retirement Plans: Which Is Best For You?
If you are self-employed, you also have a choice of several retirement savings options. In addition to the plans described below for regular employees and entrepreneurs, you can also invest in a Roth IRA or traditional IRA, with certain income limits, which have smaller annual contribution limits than most other plans. You also have several other options that aren’t available to everyone, including SEP IRAs, SIMPLE IRAs, and solo 401(k).
Since their introduction in the early 1980s, defined contribution (DC) plans, which include the 401(k), have taken over the retirement market. According to a recent study by insurance broker Willis Towers Watson, about 86 percent of Fortune 500 companies in 2019 offered only DC plans instead of traditional pensions.
The 401(k) plan is the most widely used DC plan among employers of all sizes, while the similarly structured 403(b) plan is offered to employees of public schools and some tax-exempt organizations, and the 457(b) plan is most commonly available to state and local governments.
The employee contribution limit for each plan is $20,500 in 2022 ($27,000 for those age 50 and older).
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Many DC plans offer a Roth version, such as a Roth 401(k), where you use after-tax dollars to contribute, but can withdraw the money tax-free in retirement.
“Roth elections make sense if you expect your tax rate to be higher in retirement than when you’re contributing,” says Littell.
A 401(k) plan is a tax-advantaged plan that provides a way to save for retirement. With a traditional 401(k), the employee contributes to the plan with pre-tax wages, meaning contributions are not considered taxable income. A 401(k) plan allows these contributions to grow tax-free until retirement. At retirement, distributions create taxable income, although withdrawals before age 59 ½ may be subject to additional taxes and penalties.
With a Roth 401(k), the employee contributes after-tax dollars and the earnings are tax-free as long as they are withdrawn after age 59 1/2.
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Pros: A 401(k) plan can be an easy way to save for retirement because you can schedule money to come out of your paycheck and be automatically invested. The money can be invested in a number of high-return investments, such as stocks, and you won’t have to pay tax on the gains until you withdraw (or sometimes until
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