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Choosing the Right Long-Term Savings Plan

woman in blue striped shirt and glasses sitting at a table covered in receipts and typing on a calculator

It’s never too early to start thinking about long-term savings. In fact, a startling amount of the population doesn’t have close to enough money saved to survive retirement. Long-term saving ensures that you have money for the rest of your life and it can ease any financial stress. Not all long-term saving plans are created equally, and below we will explore a few different options to help you choose the best plan for you.

Consider the Roth IRA to Avoid Taxes Upon Withdrawal

A Roth IRA is a great option for your long-term savings plan if you qualify. It differs from the traditional 401(k) in a few different ways. Any contributions to a 401(k) are pre-tax which means that they are deposited before your paycheck and income tax deduction. Additionally, when you withdraw from your 401(k), the withdrawals are taxed at your current tax rate. Roth IRAs are considered an after-tax investment, meaning contributions may be deductible in the year they are made to the account. However, you may have to wait longer for the tax-savings payoff. This could be a worthy option if you expect your tax rate to increase over time.

One caveat is that contributing to a Roth IRA is limited to individuals with an income under $144,000 or a couple with an income under $214,000. In addition, you are limited to a $6,000 annual contribution, unless you are 50 years or old. In this case, you can contribute up to $7,000.

If you’ve planned ahead and are willing to wait, this is a great option. With the Roth IRA route, when you begin to make withdrawals in retirement, you won’t owe a thing to the IRS.

The Traditional IRA Defer Tax

A traditional IRA is another option. A traditional IRA is a type of retirement account for an individual where they can make pre-tax contributions, allowing the investment in the account to grow tax-deferred. However, in retirement, you will be required to pay income tax on withdrawals with a traditional IRA. Traditional IRAs share the same annual contribution limits as the Roth IRA. It’s also easier to tap into your IRA a little early for qualifying college expenses or the purchase of your first home without penalty, however you will be required to pay taxes on the disbursement.

If you’re considering opening a traditional IRA with us at Highlands Community Bank, there are a few requirements. Keep these things in mind:

  • Minimum opening investment of $500
  • IRA terms vary from 12, 36, or 60 months
  • May be subject to early withdrawal penalty

Certificate of Deposit

Another great option for long-term saving is a Certificate of Deposit or CD account. A CD is an account that has a fixed interest rate and set length of time for the account. When you open a CD, you will set an end date or “maturity” date. You will not be able to withdraw money prior to that date without penalty. You can also choose to renew your CD for another term period if you’re not ready to withdraw.

A CD is a great option for individuals who want to know exactly what their payout will be after a certain period of time. The downside to a CD is that they often have higher interest rates than savings accounts. They do however offer lower returns than a highly volatile investment such as stocks. A CD is well suited for a shorter-term saving goal and perhaps those individuals living on a fixed income. IRAs are better for long-term savings as there are more risks that can play out over a substantial amount of time. Thinking a CD might be the right next step for you in your financial journey? If you’re considering opening this type of account, contact us! The requirements include:

  • Minimum opening investment of $500
  • CD terms vary 3 months to 5 years
  • May be subject to early withdrawal penalty

Decision Time

So, how do you know what’s right for you? Think about what works for you and your wallet. What future plans do you already have in place? Can you afford to wait to withdraw your money, or do you need a more flexible option? If you need help answering any of these questions, Highlands Community Bank is here for you! We want to help you reach your long-term financial goals, and are just a visit or phone call away!

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