Do You Really Need A 401 To Retire People Over 50 Without One Weigh In
It’s easy to think of a 401 as the end-all-be-all of retirement planning and savingbut it doesn’t have to be. These folks over 50 share why they’re making it work without a 401.
Most employers offer their employees a 401 plan, which is a retirement account that employees automatically contribute money to from their payroll. Their contributions aren’t taxed until they withdraw their earnings, typically after retirement. Employees can contribute up to $19,500 to their 401 plan for 2021. If you are 50 or older, you can contribute an extra $6,500 this year in what’s called a catch-up contribution.
One of the main differences and perks of a 401 compared to a traditional savings account is that many employers will match the money that you’ve contributed. According to Ubiquity Retirements and Savings, about 51 percent of employers offer 401 matching. Still, the U.S. Census Bureau found that only 32 percent of Americans are investing in a 401 plan, even though 59 percent of Americans have access to one. Many people believe that it’s time to ditch the 401.
Ahead, more reasons why some people over 50 don’t have a 401and maybe you won’t, either.
Invest In Real Estate
Real estate could be a good place to tap into if you are looking to diversify your portfolio. There are a couple options. If you want to get hands-on, you can buy a home and rent it out, flip houses, or rent out your existing home. Or if you dont want to be quite so involved, investing in real estate investment trusts is another option.
If you are buying a property, experts advise you put the down payment funds in a fairly liquid account, so that its immediately available when you need to make a purchase.
Whichever way you choose to invest in real estate, you want to keep up with the latest economic trends, especially the real estate market.
Unlike many other highly liquid investments, properties cannot be bought and sold for profit in a heartbeat. You want to set aside cash for other life expenses before jumping into real estate, because you are likely to hold the property for a long time.
Best for: Investors with a large sum of cash to cover a down payment and those who understand the real estate market.
Wait But What About Bitcoin
Bitcoin has had a wild ride, often moving thousands of dollars a day. And its been in the news constantly. But, as with any high-risk financial move, you shouldnt invest unless you are willing to lose it all. There are no consumer protections on Bitcoin. If Bitcoins are lost or stolen, they are gone forever.
That being said, if you are curious about it and want to learn how it works, you can throw in $20 or $100 to buy through a digital currency exchange or broker. You can read more about the cryptocurrency craze in our ultimate Bitcoin guide.
Best for: Curious investors willing to experiment and potentially lose.
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The Winner Is Always Wall Street
Today, everyone is expected to learn to invest if they want to retire. If you don’t learn? You pay someone on Wall Street to do it for you. If you do learn? You still pay Wall Street: Every time you buy a stock, mutual fund or exchange-traded fund , someone on Wall Street gets paid. This is whether you make money or lose money. Wall Street is the house, and we are the gamblers. The government watches from the sidelines and hopes the market keeps going up.
Indirect 401k Rollover Into Gold
Investors with 401k can also use the indirect rollover method to buy gold. The difference between direct and indirect rollover is that in the indirect rollover you have to finish the process within 60 days. It means you have to transfer the money to your custodian or gold IRA company immediately after receiving the funds. How about if you cant finish the process within 60 days? The risk is that you have to pay a tax penalty. You often have to pay a 10% tax penalty if you are 59.5 years old or younger.
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How To Invest Without A 401
Fortunately, you do have some alternatives if your company does not offer a 401 plan or a good one. For example, anyone with earned income can access an IRA and those with their own business even a side gig have alternatives, too.
If your employers retirement plan doesnt measure up, here are eight investing alternatives to consider:
Pros Of Rolling Over A 401
Now we will discuss the overall advantages and disadvantages of rolling over a 401. Lets start with the advantages:
Consolidate your accounts: 401 accounts didnt have to be dealt with as often in prior generations, where working adults held down a job at the same company for many years. In this day and age, workers are changing jobs frequently. Moving your retirement savings from 401 to 401 could become quite the headache. By opening an IRA, you can then consolidate by funneling all your 401 accounts into one IRA.
Increase your investment options: A 401 typically offers very limited investment options, since theyre pre-selected by your employer. With an IRA, youll have more power to decide how your funds are invested. Options include stocks, bonds, and other types of investment vehicles.
Enjoy freedom: Finally, rolling over a 401 gives you the freedom to do what you want, clear and simple. If you have a financial advisor who suggests a specific type of investment account or brokerage, you have the freedom to take your savings where youd like.
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Contribute To A Roth Ira If You’re Eligible
Roth IRA contributions cannot be deducted from your taxes in the current year, but earnings from Roth IRAs are tax-deferred and withdrawals after the age of 59 1/2 are not taxed. The tax deferral on your Roth IRA’s earnings is valuable because it expedites your savings growth.
Without any recurring tax implications, you don’t have to pull money out of the account each year to pay Uncle Sam. And the ability to withdraw money tax-free in retirement could save you thousands if you are in a high tax bracket when you leave the workforce.
There’s one other advantage of the Roth IRA. Since you contribute to your Roth IRA with after-tax money, you can withdraw your contributions at any time without paying a penalty. You are only penalized for withdrawing earnings, until you reach the age of 59 1/2 and at least five years have passed since your first Roth IRA contribution.
The Roth IRA does have two drawbacks. One, the annual contribution limits are fairly low. In 2021, you can contribute up to $6,000 annually, or $7,000 if you’re 50 or older. That limit applies to your combined deposits to Roth and traditional IRA accounts. And two, eligibility for contributing to a Roth IRA is based on your income and tax filing status. As the table below shows, you can’t put money in a Roth IRA if you have a high income, unless you use a backdoor Roth IRA strategy.
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Invest In A Health Savings Account
Health savings accounts are tax-advantaged accounts that are linked to high-deductible health plans. You may be able to use an HSA to your advantage if you have a high deductible health plan at work, or if you pay for one as a self-employed business owner.
HSAs aren’t specifically designed for retirement, but they offer three valuable tax benefits:
- Tax-deductible contributions
- Tax-free withdrawals for qualified medical expenses
- Tax-deferred growth
The advantage of including an HSA in your retirement strategy is that this can essentially be tax-free money that you can use to pay for health care as you get older. It can help you avoid having to tap into other retirement streams of income to cover medical costs.
You can withdraw money from an HSA without penalty for any reason when you reach age 65, whether it’s for healthcare-related spending or something else. You can contribute $3,650 to an HSA if you have individual coverage in 2022, or $7,300 for family coverage.
You won’t face a tax penalty for non-healthcare withdrawals from an HSA after age 65, but you’ll still owe ordinary income tax.
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If You’re Creative Enough You Can Cook Without A Stove Dance Without Music And Wait Without Impatience But Can You Save Without A 401
It may not be easy to save for retirement without a 401, but it’s also not impossible. According to a study by the Aspen Institute, 55 million Americans are tasked with that very challenge. Fifty-five million is the number of individuals who have no access to a 401 — which means that they’re saving without the benefit of 401 perks like automatic payroll deductions, high contribution limits, or employer-funded contributions.
Those 401 perks may automate and expedite savings progress, but they don’t make or break your ability to save for retirement. If you know how to maximize the advantages that come with other types of investing accounts, including Individual Retirement Accounts , taxable brokerage accounts, and solo 401s, then you have a great shot at setting up the rich and comfortable retirement of your dreams. Here’s what you need to know.
Pros And Cons: 401 Vs Ira
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Dont Forget About Brokerage Accounts
Its important to use savings vehicles that can help reduce your tax burden today or in the future, like IRAs and HSAs do. But even more important is the act of saving and investing itself.
Dont shy away from your regular taxable brokerage account if youre maxing out an IRA and HSA and still have money you could put away for the future. While it doesnt offer you a tax advantage, it does diversify the kinds of accounts you have.
Retirement accounts come with a lot of rules and limits, including how much youre allowed to contribute, when you can access your money, and how you can spend the money.
Brokerage accounts, on the other hand, are pretty much limitless. You can contribute however much you want and you can use that money any time which may be useful to you if youre interested in early retirement or you need that money before retirement age.
Option : Transfer The Money From Your Old 401 Plan Into Your New Employers Plan
Moving your old 401 into your new employers qualified retirement plan is also an option when you change jobs. The new plan may have lower fees or investment options that better support your financial goals. Rolling over your old 401 into your new companys plan can also make it easier to track your retirement savings, since youll have everything in one place. Its worthwhile to talk with an Ameriprise advisor who will compare the investments and features of both plans.
Some things to think about if youre considering rolling over a 401 into a new employers plan:
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What Is A 401 Rollover
A 401 rollover is when you transfer money out of your retirement account into a different account. Its important to know that you dont necessarily have to do this immediately. Once you withdraw funds out of your 401, the IRS gives you 60 days to deposit it into another retirement account. However, you can only do this once every 12 months.
Employees often find the need to roll over their 401 to a personal individual retirement account when they leave a job or retire. However, others might choose to use this as a strategy to invest in real estate.
The 401 Contribution Amount
There’s no one-size-fits-all 401 contribution amount for everyone. It’s best to save as much you can afford to without hurting your other financial goals and obligations.
You might be placing too much into your account if you don’t have enough left over to pay your rent or reduce your credit card debt. On the other hand, contributing the full $19,500 per yearthe maximum allowed for tax year 2021 along with any catch-up contributions, maximizes your returns. You’ll have even more money working for you if your employer matches your contributions.
Many people experience life changes within a year. You should adjust your savings and portfolio balance whenever you have a big change that affects your finances, such as buying your first home or having a child.
Work through your finances to decide how much you can put into your 401 each month. The amount you come up with is called your deferral percentage. Revisiting this amount every three months is a good practice to make sure you’re saving as much as possible.
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Choosing The Right Roadmap
TDFs reduce risk over time by gradually lowering the portfolio’s exposure to stocks and increasing exposure to bonds. The roadmap that defines this transition is called a glide path. What can be confusing for 401 savers is that two funds with the same vintage can have dramatically different glide paths.
As an example, some glide paths reach their most conservative point in the target year. Others delay the most conservative point to sometime after the target year. The delayed approach is riskier, but offers more growth potential.
Understanding that difference can help you choose the right TDF for your situation. Chances are, you have one family of TDFs available in your 401. If you don’t like that fund’s glide path, you can address it by choosing a different vintage. An earlier year would be more conservative, while a later year would be more aggressive.
For example, say you plan to retire in 2050. You see that the glide path for the 2050 fund in your 401 reaches its most conservative point in 2055, or five years after the target year. If that’s too risky for your taste, invest in the 2045 fund instead.
A 2045 fund in the same family will also settle into its most conservative portfolio five years after the target year. In this case, that would be 2050 — your planned retirement date.
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