How to save for retirement in a world of dwindling pensions | Companies

Today more than ever, people are responsible for their own retirement. Unless they work for a government agency or large company, they are unlikely to get a pension.

That said, if you want an income in retirement to supplement your social security, you need to save money.

The first mistake many people make is not saving enough. There are studies that say the average balance of 401 (k) is only $ 83,000. Under the 4% rule, a 65 year old retiree would only get about $ 275 per month. This will not provide the money necessary to complement the retirement of your dreams.

There are three types of money in the eyes of the Internal Revenue Service. The first is an Ineligible Account or an After Tax Account. This can be money left over after you’ve paid your bills from your paycheck. You may receive this type of money as a gift or as a beneficiary of a life insurance policy. You owe taxes only on income from that money.

The second type is a Roth IRA. You can contribute earned income to a Roth every year. For 2021 the amount is $ 6,000. If you are over 50, you can wager an additional $ 1,000.

You will not receive any tax deduction for this contribution. It grows tax-free if you follow two basic rules to take the income out: You must be at least 59½ years old and have had a Roth for at least five years. You can withdraw your contributions at any time with no penalty as you have already paid tax on this money.

It is important to remember that you must have an income that is at least equal to your contribution. Earned income is basically the income you pay social security taxes on, not from gifts or other investments. There are no minimum distributions required during your or your spouse’s life. You must follow the new 10-year rule if you are left with another beneficiary.

Qualified money or money before taxes is the third type. These are accounts like a 401 (k), an IRA, or a 403 (b). Contributing to these accounts can lower your current income tax. The funds will grow for tax purposes until you pull the money out.

The income brought in must be earned income. You pay normal income taxes on this money when you receive it, and the minimum payouts required start at age 72.

This type of account can be very important. The problem is that many people have almost all of their savings in this type of account. This can lead to a tax time bomb in retirement. The Secure Act changes these plans to opt out instead of signing in. This will allow more people to participate, which will help the future of their retired families.

What you don’t want to do is have a lot of credit in qualified accounts only and very little in the other two types. This gives you better ways to manage future tax obligations.

Saving more is necessary. Just do it in the best possible way.

Gary Boatman is a Monessen-based Certified Financial Planner and author of Your Financial Compass: Safe passage through the turbulent waters of tax, income planning and market volatility.

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