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Retirement Planning: Alternatives to 401K

Apr 20, 2016

Reaching your 50s or 60s with very little money set aside for retirement is not unusual. According to the National Institute on Retirement Security, American households led by someone who is close to retirement age have on average $14,500 in retirement savings.

It is really important to know all your options so you can get all your financial needs covered for the golden years. With this in mind, we have created a quick guide to save for retirement.

Standard tax-advantaged plans – like 401(k)s– are a great place to start saving as much as you can as soon as possible. Those in their fifties and older can contribute up to $24,000 per year.

If you see saving the maximum in your 401(k) plan as an impossible, there are other options that can work well for your retirement saving goals, let’s take a look at them!

Traditional IRAs – The Best Option for the 50 Plus

An IRA (Individual Retirement Arrangement) is a personal savings plan that allows you to set aside money for retirement with tax advantages. In terms of banking, your IRA can take the form of an individual retirement account or an individual retirement annuity.

All the contributions you make into a Traditional IRA may be tax-deductible. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. At that point, both deductible contributions and earnings will be taxed at your regular income tax rate when the money is withdrawn.

But, can anyone contribute to a Traditional IRA? You are eligible to contribute to this type of IRA if you are under age 70½ and you have eligible compensation, what is generally defined as the money you earn from working and includes wages, salary, tips, bonuses, commissions, and self-employment income, but not investment or pension income.

You also are eligible to contribute to a Traditional IRA if you are a non-earning spouse under the age of 70½ who files a joint tax return with a working spouse.

Roth IRAs – Pay Less Tax On Earnings Regardless Your Age

One of the greatest benefits you get from a Roth IRA is that you don't have to pay tax on the earnings that accumulate if you have a qualified distribution.

Also you can allow your money to accumulate tax-free for as long as you want. If you should need to dip into the money early, you can take your contribution amounts out tax- and penalty-free regardless of whether your distribution is "qualified". This basically means that, as a Roth IRA owner, you can withdraw up to the total amount of your annual contributions at any time and for any reason tax-free and penalty-free.

Finally, one of the best parts of saving for retirement with a Roth IRA is that you don’t have to take required minimum distributions (RMDs) when you reach a certain age. Thus, you can let your savings accumulate tax-free longer and remove your money whenever you need it.

Do you wonder if you are eligible for a Roth IRA? You are if you or your spouse (if married and filing a joint tax return) have eligible compensation.  As mentioned earlier,  this is what you earn from working and includes wages, salary, tips, commissions, bonuses, and self-employment income, but not investment or pension income.

Certificates of Deposit

A certificate of deposit, also known as CD, is an investment vehicle where you can place a lump sum of money into an account for a specific period of time at a predetermined guaranteed interest rate.

This is one of the safest investments you can make when saving for retirement, as the guaranteed CD rate of interest comes with no market risk. However, you will not have access to the funds before the CD matures – at least without incurring early withdrawal fees.

Also, CDs are safe investments, as amounts up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC). They usually provide a better return on an investment than money market funds, making them a good investments if you are averse to risk and want to know exactly how much your investment will be worth at the end of the term.

What's Next?

Although it is true that it is never too late to save for retirement, it is hard to make up for decades of lost time. Earlier, smaller contributions will add up to more money in your retirement savings thanks to compounding interests.  So regardless of the saving method you choose, the key is to start your saving plan now, no matter how small.

At Bank of Internet USA we want to help you discover different ways you can save for retirement so you can choose those that better fit your age and financial needs. If you are interested in finding more about the best online banking options, visit