Humphrey Yang: Retirement Accounts for Beginners
Written by
Katie Wudel
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It’s important to understand the nuances of retirement planning. Financial expert Humphrey Yang recently provided a tutorial on various retirement accounts. His guide serves as a reference for beginners navigating the complexities of retirement accounts.
The 401(k) Plan: A Common Choice
Yang starts with the 401(k), a popular retirement account. During an episode of his show, Yang explains the key feature of a traditional 401(k) is tax-deferred earnings growth, meaning taxes on gains are paid upon withdrawal after age 59 1/2.
Withdrawing earlier will result in a 10% penalty. The traditional 401(k) also lowers taxable income. For instance, contributing $10,000 from a $75,000 salary means you’re only taxed on the remaining $65,000.
In 2023, the traditional 401(k) contribution limit was $22,500 (for those under 50 years old) and $30,000 (for those over 50 years old). In 2024, the contribution limit is $23,000 (under 50 years old). The contribution limit for those over 50 remains the same.
Traditional IRA: Flexibility for Individuals
Next, Yang discusses the traditional Individual Retirement Account (IRA). Unlike the 401(k), an IRA doesn’t require employer affiliation but requires earned income. The contribution limits for 2023 were $6,500 (under 50) and $7,500 (over 50).
For 2024, the contribution limit for those under 50 increased to $7,000. The catch-up contribution for those over 50 remains the same. A unique aspect is the ability to contribute to the previous year’s limit until the tax day of the current year.
Roth Accounts: The Tax-Free Advantage
Roth accounts, named after Senator William Roth, offer post-tax funding benefits. Contributions are made with after-tax dollars, and withdrawals are tax-free. The Roth 401(k) and IRA are particularly advantageous for those who expect to continue working past retirement age. Contribution limits for the Roth 401(k) in 2024 match those of the traditional 401(k), and there are no required minimum distributions.
SEP IRA: A Boon for Self-Employed Individuals
For business owners, the SEP IRA offers higher contribution limits – up to $69,000 in 2024 or 25% of income, whichever is less. Contributions are tax-deductible, and earnings are tax-deferred.
403(b) and 457 Plans: Tailored for Specific Sectors
The 403(b) is like a 401(k) but is for employees in nonprofit organizations. Those working more than 15 years in certain organizations can contribute an extra $3,000 annually. The 457(b) plan, aimed at state and government employees, lacks the early withdrawal penalty of a 403(b) but restricts withdrawals until leaving employment.
Addressing Common Questions
Yang says it’s possible to contribute to both an IRA and a 401(k). He advises prioritizing employer-matched 401(k contributions and then maximizing IRA investments due to their flexibility.
For 401(k) investments, low-fee index funds are recommended. Individuals earning above the Roth IRA income limit can opt for a backdoor Roth IRA. Having both traditional and Roth accounts is feasible, though combined contributions have limits.
Bottom Line
Yang emphasizes the importance of understanding these retirement options and encourages consulting brokerage services or employers for personalized advice. Staying informed is the key to successful retirement planning.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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