The best savings strategy for retirement in 2024

Everyone should save for retirement. If you’re already doing this or about to start, you’ll probably want to build your retirement savings as efficiently as possible. There are smart strategies you can follow to solve this, but nearly half of Americans haven’t tried them.

The best way to save for retirement is through a retirement account. These accounts are designed specifically for retirement savings, but only 51% of Americans have one, according to investment research from The Motley Fool. If you’re not already using it, you’ll have to change in 2024.

Use Retirement Accounts to Invest and Save Taxes

Retirement accounts are the most effective savings strategy for retirement because they offer tax advantages. If you invest through a standard brokerage account, you will not receive any tax benefits. You have already paid income taxes on the money you deposited and invested in the account. If you sell a profitable investment, you will pay capital gains tax.

Retirement accounts can help you avoid some of these tax burdens. The downside is that they generally require you not to start taking withdrawals until you are age 59 1/2 or older. If you need to withdraw money before then, an early withdrawal penalty will be charged.

There are several types of retirement accounts, but the most common options include:

• Individual Retirement Account (IRA)
• Roth IRA
• 401(k)
• Roth 401(k)

You can open an IRA and a Roth IRA directly through a stockbroker. A 401(k) is an employer-sponsored plan, so you can only open a 401(k) or Roth 401(k) if your employer offers it. If you are self-employed, you may be able to open your own 401(k).

Here’s how to save on taxes with your retirement accounts:

Traditional IRAs and 401(ks)

Traditional retirement accounts allow you to make tax-deferred investments. Contributions to an IRA or 401(k) are tax deductible, and withdrawals are taxed as ordinary income.

IRAs and 401(k)s have annual contribution limits. The 2024 limits are:

• IRA: $7,000 ($8,000 if age 50 or older)
• 401(k): $23,000 ($30,500 if age 50 or older)

If you’re under 50, you can contribute up to $30,000 to IRAs and 401(k)s this year. You can then deduct $30,000 from your taxable income. If that portion of your income is taxed at 24%, you’ll save $7,200 this way.

Roth IRA and 401(k)

Roth accounts provide tax-free growth and withdrawals. Your contributions are not tax deductible, but you don’t have to pay taxes when you withdraw the money.

Although this may not save you money on taxes right away, it will be a huge advantage once you retire and start making withdrawals. If you have $500,000 spread out in a Roth account, you can use $500,000 tax-free.

The same contribution limits apply to Roth accounts, which are combined limits. For example, if you open a Traditional IRA and a Roth IRA, you can contribute up to a total of $7,000 in 2024. You can split this down the middle and contribute $3,500 each, or contribute other installments totaling no more than $7,000. .

Roth IRAs have income limits so they are not suitable for high income earners. In 2024, contribution limits will be reduced for single filers with modified adjusted gross income (MAGI) exceeding $146,000. If your MAGI exceeds $161,000, you cannot contribute to a Roth IRA at all.

How to Set Up a Retirement Account

To start using your retirement account, first check out what options are available to you. If you work for an employer, find out if your employer offers a 401(k) plan. If so, contact your HR department to open one and have your contributions taken directly out of your paycheck.

An IRA is almost always an option. Anyone with an income can open this type of account. If you are below the income limit, you can also open a Roth IRA. If you are self-employed, you can open a SEP IRA or Solo 401(k).

If you are interested in an IRA, Roth IRA, or self-employed retirement account, you can open one through an online stock broker. Here are some great IRA options:

After you open a retirement account, you also need to choose what to invest in. Options vary depending on your account type.

An IRA allows you to invest in anything your stockbroker offers. For 401(k)s, your options vary depending on your plan administrator. Most retirement accounts include target date funds built around a specific retirement year. This is a great “set it and forget it” option. If you want to retire in 2050, you can choose a 2050 target date fund and invest forward.

Retirement accounts are powerful tools. Be sure to take advantage of it to reduce your tax burden now, in retirement, or both.

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