When it comes to saving for retirement, there are many account options to wade through. With so many choices, it can be difficult to make a decision. There are work-sponsored retirement accounts and individual retirement accounts, and you’ll likely want to save in a mixture of both to maximize your retirement income.

 

Emergency Funds

 

Even if you’re saving in a retirement account, you’ll want to save up an emergency fund. This will help you pay for those unexpected expenses that will come up from time to time. Without an emergency fund, you’ll likely have to go into debt to take care of true emergencies, and this can limit your ability to save for retirement. Also, if you get to retirement with a healthy emergency fund, it can help you put off making withdrawals from your retirement accounts if there’s a market downturn.

 

401(k) Plans

 

Of the work-based retirement accounts, the most common is the 401(k). Many nonprofit employees will have access to 403(b) plans, and many governmental agencies offer 457(b) accounts. Most of these accounts will allow workers to save up to $19,500 per year as of 2020. Those who’ve reached 50 years of age can make an additional $6,500 catch-up contribution.

 

Many employers will provide matching funds for employees who save in a 401(k) or a similar work-based retirement account. Before saving in another option, it’s a good idea to save at least as much as your employer offers to match. This will allow your nest egg to compound rapidly.

 

IRAs

 

IRAs, also known as individual retirement accounts, are another option. These are not administered through a workplace, but individuals are able to set them up and receive special tax benefits. Traditional IRAs allow savers to reduce their taxable income in the current year. Many financial planners recommend saving in a Roth IRA. These accounts do not lead to an immediate tax deduction, but all withdrawals, including any capital gains and dividends, will be tax-free as long as an account holder has reached age 59 1/2. The contribution limit is only $6,000, and after hitting this mark, it’s a good idea to save more in a 401(k) if there is any additional space available.

 

Having both a Roth IRA and a 401(k) can allow retirees to live well in their golden years. Additionally, having some money in an emergency fund or a taxable account can provide more flexibility for those who want to retire before hitting a traditional retirement age. Getting started early is key, and diversifying through more than one account is a great idea.