How can you supplement your Social Security income?
When it comes to investing for your golden years, it’s crucial to start saving as early as possible. No matter if it’s through an individual retirement account, a pension plan, or an employer-sponsored 401(k), this strategy will make a huge difference.
Although financial experts recommend setting aside 10% to 15% of your annual income, you can start with baby steps and gradually increase your saving rate, especially if you have healthcare expenses, student loans, or outstanding debt from credit cards.
If your employer matches your 401(k), maxing out your contributions should be your top objective, as it’s essentially free money. It’s common for employers to match between 2% and 4% of an employee’s annual income.
Once you have maximized your employer match, you may consider opening an IRA, which is an individual retirement account separate from your employer. The two most popular retirement accounts are the traditional retirement account and the Roth IRA.
Both of them come with different tax advantages. With a Roth IRA, you can use the money that has already been taxed, and your investments grow tax-free over time. In other words, all future withdrawals are tax-free.
However, a Roth IRA comes with an income limit. For the tax year 2023, the limit for individuals is $153,000, and for married couples filing jointly, it’s $228,000.
On the other hand, a traditional IRA is a tax-deferred retirement account where your contributions are tax-deductible now, but you’ll have to pay taxes later when you withdraw money in retirement.
Depending on how much money you make in a year and whether you have a retirement plan at your workplace, your traditional IRA contributions can also be considered tax deductible. So your traditional IRA contributions may lower your income, which could cut the amount you owe in income taxes.
You may also want to read Stop Believing These 5 Social Security Myths.
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