How to save for retirement Archives

February 28, 2021

Rollover IRA vs. Traditional IRA: Whatâs the Difference?

When it comes to retirement savings, one of the building blocks of many strategies is the individual retirement account, or IRA. An IRA is a retirement plan that allows individuals to save money in a tax-advantaged way. In some cases, an individual might open a traditional IRA, and in others, they might have investments from a previous retirement plan that they need to roll over into a rollover IRA.

When it comes to a traditional IRA vs. rollover IRA, there are many similarities— but also a few differences worth noting.

What Is a Traditional IRA?

To understand the difference between a rollover IRA vs. traditional IRA, it helps to understand some IRA basics.

From the moment you open a traditional IRA, your contributions to the account are typically tax deductible, so your savings will grow tax-free until you make withdrawals in retirement. This is advantageous to some retirees: Upon retiring, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.

What is a Rollover IRA?

A rollover IRA is an IRA account created with money that’s being rolled over from a qualified retirement plan. Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.

In a rollover IRA, like a traditional IRA, your savings grow tax-free until you withdraw the money in retirement. There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:

•  IRAs may charge lower fees than 401(k) providers.
•  IRAs may offer more investment options than an employer-sponsored retirement account.
•  You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.
•  IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.

There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:

•  While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.
•  Certain investments that were offered in your 401(k) plan may not be available in the IRA account.
•  There may be negative tax implications to rolling over company stock.
•  An IRA requires that you start taking Required Minimum Distributions (RMDs) from the account at age 72 (or age 70 ½ if you turn 70 ½ in 2019 or earlier), even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.
•  The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.

A Side-by-Side Comparison of Rollover IRA vs. Traditional IRA

	Rollover IRA	Traditional IRA
Source of contributions	Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For rollover amount, annual contribution limits do not apply.	Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA.
Contribution limits	There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is $6,000 per year, plus an additional $1,000 if you’re 50 or older.	Up to $6,000 per year, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules	Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).	Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).
Required minimum distributions (RMDs)	You’re required to withdraw a certain amount of money from this account each year once you reach age 72.	You’re required to withdraw a certain amount of money from this account each year once you reach age 72.
Taxes	Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates.	If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.)
Future rollover options	As long as no other (non-rollover) funds have been added to the account, this money can be rolled into a future employer’s retirement plan, if the plan allows it.	The money in a traditional IRA cannot be rolled into a future employer’s retirement plan.
Convertible to a Roth IRA	Yes	Yes

Is There a Difference Between a Traditional IRA and a Rollover IRA?

The money you roll over to a rollover IRA can later be rolled over into an employer-sponsored retirement plan, if the plan allows it. This is not true of money in a traditional IRA.

When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan. Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.

Can You Contribute to a Rollover IRA?

You can make contributions to a rollover IRA, up to IRA contribution limits. In 2020 and 2021, individuals can contribute up to $6,000 (with an additional catch-up contribution of $1,000 if you’re 50 or older). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.

Can You Combine a Traditional IRA with a Rollover IRA?

A rollover IRA is essentially a traditional IRA that was created when money was rolled into it. Hence, you can combine two IRAs by having a direct transfer done from one account to another, or by rolling money from one IRA to the other IRA.

There’s one important aspect of the transfer or rollover process that will help prevent the money from counting as an early withdrawal or distribution to you—and that’s being timely with any transfers. With an indirect rollover, you typically have 60 days to deposit the money from the now-closed fund into the new one.

A few other key points to remember: As mentioned above, if you add non-rollover money to a rollover account, you may lose the ability to roll funds into a future employer’s retirement plan. Also keep in mind that there’s a limit of one rollover between IRAs in any 12-month period. This is strictly an IRA-to-IRA limit and does not apply to rollovers from a retirement plan to an IRA.

How to Open a Traditional or Rollover IRA Account

Opening a traditional IRA and a rollover IRA are identical processes—the only difference is the funding. Open a traditional or rollover IRA by doing the following:

•  Decide where to open your IRA. For instance, you can choose an online brokerage firm where you can choose your own investments, or you can select a robo-advisor that will offer automated recommendations based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)
•  Open an account. From the provider’s website, select the type of IRA you’d like to open—traditional or rollover, in this case—and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.
•  Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.

The Takeaway

Both a rollover IRA or traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.

One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.

Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.

Interested in learning more about growing your savings with an IRA? Explore IRA accounts at SoFi and read about the broad range of investment options, member services and investment tools available.

Find out how to save for retirement with SoFi.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

SOIN20277

Source: sofi.com

January 29, 2021

How To Save For Retirement – Answers To 13 Of The Most Common Questions

Would you like to learn how to save for retirement?

How To Save For Retirement

Learning how to save for retirement is how you start preparing for your future. It’s necessary if you don’t want to work for the rest of your life or if you want to do amazing things after you quit working, like traveling or trying new hobbies.

I don’t plan on retiring anytime soon, but it’s something I’ve spent a lot of time thinking about and planning for. There are lots of reasons for why you should too, such as:

You can retire sooner rather than later.
You won’t have to keep working forever.
You can lead a good life well after you finish working.
Compound interest means the earlier you save the more you earn.
You won’t have to rely on your children or others in order to survive.

But, many people are confused or overwhelmed when it comes to retirement savings and investing.

There are different kinds of retirement accounts, personal finance terms you might be unfamiliar with, and you might feel like you don’t have enough money to start saving.

But, you have to remember that everyone is new to this at some point. Anyone who has already started saving for retirement started where you are today – having a lot of questions about how to save for retirement.

You might even have a lot of questions that you are too embarrassed to ask anyone. However, you shouldn’t be embarrassed or feel bad about not knowing how to start saving for retirement.

Personal finance bloggers and retirement experts all started at the same point as you. No one was born knowing how!

Today, I’m going to try to take the stress out of learning how to save for retirement. I am going to explain some common retirement and investing terms – like what compound interest is, the difference in IRAs, and what a 401(k) is.

I’m also going to answer some of the most common questions about retirement savings. These include topics like how much you should save, and if you should save for retirement or help your kids pay for college.

If you are worried that you don’t have enough to start saving for retirement, I have some great tips to get started.

Learning the answers to these questions now is so important because it can help you live a better life in the future. By preparing now, you can prevent future financial stress, you can reach your goals, and pursue your passions.

And remember, it is never too late to learn how to save for retirement, and it’s very important to do if you don’t want to work for the rest of your life.

Related content on how to save for retirement:

Here’s how to save for retirement.

What is a 401(k)?

A 401(k) is a type of retirement account that you get through an employer.

It allows you to invest a portion of your paycheck before taxes are taken out, and the amount in your 401(k) can grow tax free until you withdraw. Once you reach retirement and take money out of your 401(k), the amount you withdraw from this account is taxed.

Your 401(k) is an account that holds investments, similar to how your bank account holds your money. You may choose to place investments such as stocks, mutual funds, and more in your 401(k).

What’s a company match? Or employer match?

You’ve probably heard the term “employer match” or “company match.” But, what do they mean?

A company or employer match is when your employer contributes to your 401(k).

For example, an employer may match 100% of your contribution, up to 5% of your salary. So, if you contribute 5% of your salary to your 401(k), then your employer will also match and put 5% in as well.

This is basically free money that will help you grow your retirement savings, and you should take advantage of it if you can!

What is an IRA?

An IRA (Individual Retirement Account) is a type of retirement account that anyone can open, without an employer.

If you do not work for someone else, or if the business you work for does not have a 401(k), then an IRA may be a good option for you.

This is a confusing term and topic for people who want to learn how to save for retirement because there are different types of IRAs, including:

Traditional IRA – Contributions to this kind of IRA are tax deductible the year they are made.
SEP IRA – This is a traditional IRA that offers tax breaks for those who are self-employed.
Roth IRA – This account uses after-tax money, and your withdrawals in retirement are not taxed.

One way people decide between a Roth and traditional IRA is by what their tax rate (this is based on your income) will be like during retirement. If you will be at a higher tax rate, you may want to choose a Roth IRA. If you will be at a lower rate, a traditional IRA might be better.

How much per month should you save for retirement?

What is compound interest?

This is a very important question to cover, because it’s something that may motivate you to start saving as much money as you can right now!

Learning how to save for retirement as soon as you can is a great thing, with one of the reasons being because of compound interest.

So, what is compound interest?

Compound interest is when your interest is earning interest. This can turn the amount of money you have saved into a much larger amount years later.

Compound interest is a crazy thing because $100 today will not be worth $100 in the future if you just let it sit under a mattress or in a basic, low interest checking account. However, if you invest through your retirement account, then you may be able to turn your $100 into something more.

When you invest, your money is working for you and growing your savings, and that’s because of compound interest.

For example: If you put $1,000 into a retirement account with an annual 8% return, 40 years later you will have $21,724. If you started with that same $1,000 and put an extra $1,000 in it for the next 40 years at an annual 8% return, that would then turn into $301,505. If you started with $10,000 and put an extra $10,000 in it for the next 40 years at an annual 8% return, that would grow into $3,015,055.

How much money do I need to retire? What percentage of your income should you save for retirement?

Figuring out how much to save for retirement isn’t an easy question to answer, as this will vary from person to person. It depends on your goals, when you want to retire, and what retirement means to you.

However, many people aren’t saving enough for retirement. According to the U.S. Bureau of Economic Analysis, the personal savings rate has averaged around 5% in the past year, and averaged 8.33% from 1959 until 2016.

I’ve talked to a lot of people who think that saving between 1% and 5% of their income is enough to be on track for retirement.

Sadly, saving 5% means it may take you a very long time to retire.

For the average person, I recommend saving at least 20% of your income.

However, there is no perfect percentage.

If you have a high income, then you should probably save more of your income so that you aren’t being wasteful with your money.

On the other hand, if 20% just seems like a crazy high percentage for you to save, then just start somewhere, anywhere! Saving something is better than saving nothing.

And, everyone has different financial goals. If you want to retire early, then you’ll most likely have to save more than 20% of your income.

How much money should you have saved by 30?

Many young people who are learning how to save for retirement ask me this question.

Some advisors recommend that you have an amount equal to your annual salary saved by 30, and others say that you should have half of your annual salary saved by 30.

I think those amounts are great to save by 30, but the problem with those guidelines is that if you haven’t started saving or are much older, you can easily feel like you will never be able to reach retirement.

Those recommendations may be very difficult for many people to follow. You have to be realistic with yourself, and start with small goals that you can build over time. Any amount helps, and it’s never too late to start saving!

What if I can’t save very much money for retirement?

You may be thinking “How much money should I save, if I don’t have much money?!”

Thinking about the above recommendations can be frustrating if you are already having a hard time paying your bills and/or living paycheck to paycheck.

However, I recommend saving as much money as you realistically can. This may be nowhere near 20% at first, heck, this might not even be 5%, but any little bit will help. If you are not able to save that much, just save something! Start with $25 a month if you have to – seriously, every little bit does help.

Even if it’s just $1 a day, set that amount aside and start saving it.

You may want to look into Acorns, which is a cell phone app that rounds up your credit card and debit card purchases, and then invests your spare change. Acorns automatically invests for you, and you can get started in under 5 minutes. This app is amazing!

So, no matter how you are doing right now, just start with something, no matter how small. Then, work your way up until you are saving a percentage of your income that you are happy with.

Start small and work your way towards your savings goal. And, if you are currently paying off debt, keep in mind that it counts too! Once your debt is paid off, you can use that amount towards your retirement savings.

Just keep moving in a positive direction and keep getting closer and closer to reaching your financial goals.

I understand that some people have financial situations in which they may not be able to save as much money as they would like. Living paycheck to paycheck, having lots of medical debt, or having a major unexpected expense can wreck a person’s financial situation and their goals, and I understand that.

However, you will need to find a way out of that if you want to learn how to save for retirement. To find a way out, you may want to find ways to cut your spending, make more money (learn ways to make extra money), and more. You will have to challenge yourself, and it may not be easy. However, it will all be worth it once you reach your financial goals!

By spending less money, you’ll decrease the amount of money you need for the future, including money for emergency funds, retirement, and more.

Just think about it: If you are currently living a frugal lifestyle, then you will be used to living on less in the future. This means that your saved retirement amount doesn’t need to be as large, which means it may be easier to reach that savings goal.

Where do I invest for retirement?

Now we are getting into questions about how to save for retirement that focus on some specific investing questions. And there are two main ways to start investing your money.

Either invest your money yourself, such as through an online brokerage, or find an expert to manage your investment portfolio.

Part of learning how to start investing includes determining the company, platform, or person you will use to invest your first dollar.

There are many online brokers for you to choose from. My favorite ways to save for retirement include:

Ally Invest – This is a full service discount broker that doesn’t have a minimum investment amount, so you can start investing with them right away.
Betterment – Betterment offers an affordable way to invest your money. They have over 400,000 customers and over $14 billion has been invested through their platform. With Betterment, you can invest with as little money as you want each month, which is great for a new investor!
Vanguard – I absolutely love Vanguard and use them personally, and I recommend that you check them out.

Also, if your employer has a retirement plan, then you will definitely want to look into that as well. If your company offers a retirement plan match, then this is where you will want to start as their retirement match is pretty much free money, as discussed earlier!

What do I invest in?

After you open your brokerage account, you will want to decide how exactly you will invest your money.

I think this might be one of the biggest hurdles for those wondering how to start investing. There are a lot of what ifs in the investment world, and a good brokerage or expert will help you navigate as you decide where to put your money as you learn how to save for retirement.

Basically, where you invest your money depends a lot on the level of risk you are willing to take and the time you have to watch your funds mature. A simple way of explaining this is that more time equals more risk and less time equals less risk.

For example: if you are in your 20’s, you may have many, many years worth of investing ahead of you. You will likely be able to make some riskier investments knowing that the market will bounce up and down over time. If you are closer to retirement, you may want your funds in something that you are confident will make small but steady gains.

Choosing the stocks you invest in is not the easiest thing because no one knows what will happen in the future. This is why it’s important to have a diverse portfolio.

When you are first learning how to save for retirement, you may want to consult an expert to help you determine your goals, your risk level, and how to diversify your investments in a way that will benefit you.

Even if you do have a professional helping you, it’s always important to do your own research on the types of investments available and which ones interest you.

Please remember that I am not an investment professional and that you should do your research when choosing who/what to invest in.

How often should I check on my investments in my retirement portfolio?

After you’ve started investing, you will want to regularly track your investments. This is important because you may eventually have to change where your money is invested, put more money towards your investments, and so on.

Now, the key here is to not go crazy. Checking on your portfolio can be an exciting thing when you first start investing. But, you do not want to become a person who checks their investments every hour of the day. That won’t help you at all. Your investments will make small changes throughout the day, and these likely won’t matter to you, especially if you are investing for your long-term future.

However, you do want to occasionally check your progress as things may change in the market, your investment interests may change, and you may even change your retirement and/or investing goals.

A free tool that I recommend using to monitor your investments is Personal Capital.

You can see your investment portfolio all in one place so that you can easily track your performance, see your investment allocations, and easily analyze everything related to your investments. The Personal Capital Retirement Planner will also tell you if you have saved enough for retirement, which is great when you’re learning how to save for retirement.

Should I risk my retirement and help my children pay for college?

If you are not currently saving enough money for retirement, and you are in jeopardy of not retiring, then I do not recommend risking your retirement to help your children pay for college.

I have personally heard too many real life stories of parents who have $200,000 in student loan debt for their children. These parents have found that these debts are causing them to struggle financially and that they’re unable to reach their retirement goals.

These parents just honestly want to help their children get through college, but they end up drowning in debt. What they don’t realize, though, is that there are other ways to help your kids graduate from college.

I recommend learning more at Parents Paying For College – Is This A Good Idea?

What are the best retirement and investing books?

There are many great investing and retirement books if you want even more about how to save for retirement. These books can clear up any other questions you have, as well as dive deeper into the many different ways to retire.

Here are some of the investing and retirement books that I recommend:

There are many more out there, but these are great books to start with. I have read each of them, and they are all very helpful.

How do I actually start saving for retirement?

There are many different ways to save money for retirement.

Actually getting started can be difficult, so in this section I wanted to list out the steps so you can learn exactly how to save for retirement.

Start setting aside money for retirement. If you want to learn how to save for retirement, you need to start setting aside money specifically for it. The amount of money you save is entirely up to you, but in general, the more the better. You can take money out of each paycheck, set up direct deposit, etc.
Research and learn more. I recommend learning more about investing and retirement if you are unsure about anything, such as by reading retirement books, websites, and so on. Sure, it can be easy just to hire someone to do it all for you – but how do you know that they are doing the correct thing to begin with? So, I recommend at the very least having a basic knowledge of everything yourself first.
Choose a brokerage or someone to manage your investments. Like I said earlier, there are two main ways to invest your money – yourself through a brokerage or you can find someone to manage your investment portfolio for you. You will need to choose one of these options to actually start investing your money. Personally, I like to do everything myself through Vanguard.
Decide how you will invest. How you invest depends on your risk tolerance, the time period for which you are investing (when will you retire?), and more. Generally, the sooner you need your funds the less risk you will take on, whereas the longer your time period is, then the more risk you may be willing to take.
Track your investment portfolio. This is important because you may eventually have to change what you are invested in, put more money towards your investments, and so on.
Continue the steps above over and over again. To invest for years and years to come, you will want to continue the steps above over and over again. Now that you know how to save for retirement and the steps it takes to invest your money, it only gets easier.

As you can see from the list above, saving for retirement is attainable, and you can do it!

What else do you want to learn about how to save for retirement? When do you think you’ll retire?

<!–
–>

Source: makingsenseofcents.com