Disclaimer: The following content is not financial advice and is for informational purposes only.
Over the last year, Coronavirus has derailed many people’s financial goals, including their savings goals for retirement. Even though the virus is still present as we enter the New Year, 2021 brings with it hope for a return to normalcy. Saving now is an important step towards having a financially secure retirement in the future. Depending on your financial situation, it may be time to re-evaluate your financial goals and get yourself back on track.
Retirement Account Types
You may already be contributing to a retirement savings account. Some of the most popular options include Individual Retirement Accounts, or IRAs, and employer-sponsored 401(k) plans.
- IRAs are tax-advantaged savings accounts designed to help you save for retirement. There are two common types – Traditional IRAs and Roth IRAs. These accounts differ in how and when you receive the tax-advantages. Traditional IRA contributions are tax-deductible while withdrawals during retirement are taxable. In contrast, Roth IRAs offer tax-free withdrawals during retirement and contributions are taxable.
- 401(k) Plans are one of the most common ways to save for retirement. These accounts allow employees and their employers to contribute to the employee’s retirement. Some employers offer 401(k) matching opportunities – the employer will match an employee’s contribution or a percentage of their income. Along with these advantages, contributions are also tax-deductible.
Whatever your chosen plan, you should aim to have a monthly contribution of 10%-15% of your total income. If your employer offers 401(k) matching, be sure to take advantage of this benefit and consider at least contributing the maximum percentage match offered.
If the pandemic caused a strain on your finances you may have thought about lessening or even stopping the amount you contributed to your retirement account in 2020. If your financial situation has improved, consider getting back on track with your retirement savings strategy. The sooner you’re able to start saving again the better your chance of reaching your target retirement goals.
How Your Funds are Invested
With both IRAs and 401(k)s you will have the opportunity to decide how your contributed funds are invested. Types of investments include:
- Mutual Funds
- Company Stock
- Variable Annuities
- Index Funds
Each type of investment has its own level of risk. Some plans may offer a target-date retirement fund – which is a portfolio made up of different investment types that automatically adjust to more conservative and low-risk options as you near retirement. Keep in mind that all of your savings, contribution, and investment decisions should be based on your personal financial needs. Discuss your situation and options with a financial advisor to decide what strategy is right for you.
Important Things to Know for 2021 (2020 Tax Year)
Contribution Limits and Deadlines for 2020 Taxes
You can make contributions to your IRA for 2020 until April 15, 2021. Your total contribution can’t be more than $6,000 ($7,000 if you’re age 50 and older), or if less, your taxable compensation for the year.
The SECURE Act
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The SECURE Act made numerous changes aimed at improving Americans’ ability to save for retirement. Provisions of this law are effective for the 2020 tax year and may impact your IRA.
Some key directives of the Act include:
- A change to the required minimum distributions (RMDs) starting date age from 70½ to age 72;
- Removal of the previous age limit to make regular contributions to a traditional IRA;
- Changes to inherited IRA beneficiary options – requiring many beneficiaries to withdraw assets from an inherited IRA within 10 years – eliminating the “stretch” IRA.
You are encouraged to consult your tax or legal professional for further details and guidance. More information can also be found at www.irs.gov.To learn more about saving for retirement check out our digital financial resources. If you’re interested in opening an IRA, contact your local branch to discuss your options.