Have you ever wondered when and how much you should contribute to your retirement accounts? You’re not alone. The easy answer is “early, often, and as much as you can”. Too vague to be helpful? We understand. To really answer these questions you must first know what type(s) of retirement account(s) you own. Are they accounts offered by your employer? Personal accounts? Public sector plans? For many investors, it’s a combination (especially when adding consideration in for your spouse’s account(s)).
The most common retirement plan is the employer-sponsored 401(k). Over 80 million people own some type of 401(k) account. 401(k) accounts offer high contribution limits. $19,500 for the year 2021 (or $26,000 if you are 50 or older). Your employer can (and may) also contribute to your 401(k) account, raising the total contribution limit to $58,000, (or $64,500 if you are over 50). Often employers will contribute to your 401(k) through a matching program. For example, they will match your contribution dollar for dollar up to some percentage of your salary (generally around 3%). Financial Professionals often recommend that you take advantage of this match as it is in essence, free money to you (you can’t take it as salary or bonus or any other means).
Individual Retirement Accounts (IRAs) are also popular, generally in the form of a Traditional or Roth IRA. With traditional IRA’s your contribution is made before taxes and distributions are taxed when withdrawn. Roth IRAs are the opposite, you make contributions with after-tax dollars but distributions are then tax-free. The 2021 combined annual contribution limit for Roth and traditional IRAs is $6,000 ($7,000 if you're age 50 or older). Unfortunately, Roth contributions are diminished as you hit higher incomes and can even be eliminated.
457 and 403(b)s are examples of public sector retirement accounts (generally meaning they are sponsored by public, or government agencies). In 2021 you can contribute up to $19,500 in these accounts (plus another $6,500 if you are over the age of 50). There are also additional provisions allowing for greater contributions if you are three years from retirement age.
The above are the most common types of retirement plans. It is not, however, an exhaustive list. There are a myriad of account types and plans that could be right for you. InvestorKeep suggests you talk with your financial professional to find the appropriate plan(s) for you. Maximizing your retirement plan contributions is almost always a good idea but doing it correctly, given your circumstances, can make large differences in fees, penalties, and taxes.