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These Are the Three Retirement Accounts You Should Maximize in 2022
These retirement accounts can help build long-term wealth and you can get started now.
Retirement can seem far off in the future for some people. It's not worth starting today. Many would argue that it is impossible to get started too early. The sooner you start the sooner you will be able retire.
A 2020 Statista survey found that 41% of Americans have less money saved for retirement. This is due to the declining support of pensions and Social Security which leaves future generations vulnerable to not having enough money for their post-work lifestyles.
There are many ways to start saving for retirement. With a few simple steps and commitments you can relax knowing that you are giving yourself the opportunity to retire comfortably and possibly early.
Choose explains three tax-advantaged retirement account options you can start to fill out, and what to do with each.
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These are the three retirement accounts that you should aim for in 2022
There is no one way to save money for retirement. It's unlikely that you can save enough money to retire by simply putting it in a savings account. This is especially true with record-low interest rates, high inflation and other factors. To reach your retirement goals, you must invest. Each account below allows you to increase your wealth by investing in the market. Additionally, they offer tax benefits.
Although it sounds risky to invest in the stock market, investing in low-cost, simple index funds can provide you with consistent returns over the long-term.
Even if you are closer to retirement, there is still time to start building your retirement savings. These are three accounts that you might want to look into.
1) Health Savings Account
A HSA (Health Savings Account) allows consumers who have a high-deductible health plan (HDHP), to save money for future medical expenses. Here's how it works.
You can choose to have some of your pay taken out before tax and placed into an HSA if your employer has an HSA. These funds can be used to reimburse qualified medical expenses or you can also invest them in stocks, bonds, or index funds.
The best part is that your money can grow tax-free as long as it is used for medical expenses. You can withdraw money from this account after you reach 65, and it is free of charge. It will be subject to ordinary income tax. However, you can withdraw the money at any time you like.
This account is often referred to as “triple-tax advantaged”, as money can go in tax-free, grow tax-free, and can be taken out tax free as long as certain criteria are met.
The deposit limits for 2022 are $3,650 per single-filer and $7,300 per family. This is slightly higher than 2021.
You can open your own HSA if your employer does not offer one. This will allow you to claim a tax write off for the contributions.
Employers offer a 401 (k) account where you can save pre-tax money for your retirement. Your employer might offer a dollar for dollar match to encourage you to save.
The account has some restrictions. After you turn 59 1/2, you can withdraw funds from your retirement plan (without being penalized). You will need to pay income tax when you withdraw the money. If you decide not to touch your 401k and want compound interests to keep working for you, then you must still take distributions by April. After you turn 72, 1 is required.
The deposit limit for 2022 is $20,500. This does not include any matching funds offered by your employer.
Note: A 401(k) is not an option for your employer. You may be able to open a Traditional IRA that offers similar benefits. In 2022, you can contribute $6,000 annually to an IRA.
3) Roth IRA
A Roth IRA retirement account is offered by many brokerages such as the top recommended Fidelity or Vanguard. Roth IRAs allow you to invest post-tax money and receive tax benefits when you retire. The account does not offer tax incentives at the beginning because you will be investing income that has already been taxed. There are great tax breaks at the back, as all the money, gains included, isn't subject to tax when you withdraw your funds. This can be done once you turn 59 1/2.
You can also withdraw your contributions at any moment without penalty if you require flexibility. If you deposit $1,000 in a Roth IRA, invest it and get $1,200, the $1,000 can be withdrawn with no penalties or fees.
The deposit limit for 2022 is $6,000 per person.
You can have a Roth IRA opened with a robo advisor. This will allow you to invest in a way that suits your risk tolerance and retirement dates. As you approach your retirement date, robo-advisors such as Wealthfront or Betterment will adjust your investments.
The power of investing in the future
These accounts allow you to legally avoid taxes, and to invest in the stock markets to help you save for retirement. This is what it looks like for your wallet.
Let's take, for example, that you max each account out in 2022 as a single-filer. This would mean that you could invest $30,150 in stock market, assuming there is no employer match for your 401k. With a modest 7% average return over 30 year, this investment will almost double to $230,000.
Let's say that you could invest $15,000 each year in all three accounts for the next 30 years. If you assume 7% growth, this would give you just over $1.5million for a total investment $450,000. If you were to continue the project for 35 years, it would yield a total of $2.2 million.
The key ingredient that creates compound interest is time. The more time your money has in the market to work for it, the greater its potential for compounding and growth.
Although saving for retirement can be put off until later, it is never too late to start. You're limiting the time for your dollar bills to grow in the market by not starting it sooner.
If you are still planning your financial goals for this year, you might consider focusing some effort on these accounts. As long as your high interest debts are paid off and your budget is well-balanced .
This is our disclosure: This summary is for informational purposes only. This summary is not intended to be a recommendation for or give advice for any company or individual.
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