Yes, You Can Manage Your Own Retirement!

Many financial professionals will, for a fee, help you navigate your way to and through retirement. Using a financial advisor isn’t mandatory. If you can’t afford, don’t trust, or otherwise would prefer not to use an advisor, managing your retirement is always an option. You have to map out a sensible plan and be willing to follow it. Here are some of the basics of a do-it-yourself strategy.

Start Well Before Retirement

If you are serious about taking retirement into your own hands, start as early as possible by adopting one simple habit: pay yourself first. Figure out a reoccurring amount of money that you can set aside for the future.

Retirement plans like 401(k)s, which take money automatically out of your paycheck, make that almost effortless. Many 401(k) platforms also make it easy to enter what percent of income you want to be deducted and placed into your retirement account. Though you can often easily change your contribution amount, it’s important to treat this expense as a current bill, ensuring you have consistent cash flow entered your 401(k).

If you don’t have a 401(k), you can sign up for regular automatic withdrawals that will come out of your bank account and go into an individual retirement account (IRA). IRA contributions can’t be deducted out of your paycheck since you (and not your employer) manage your IRA. This gives you even more flexibility in selecting when and how much gets taken out of your account.

Understand Retirement Account Options – 401(k)

There are two primary retirement account options: the 401(k) and the IRA.

When you start a new job, you may have the option to sign up for the company’s 401(k) plan. The employer will manage the plan, but you contribute to it and pick the investments. A very important aspect of a 401(k) is employer matches of contribution. It’s important to maximize your employer’s 401(k) match, as these contributions are often very worthwhile to take. In addition, since you don’t have as much flexibility with the broker or investment options, be mindful to avoid excessive fees and commissions when you invest.

401(k) Contribution Limits

For 2022, you can contribute up to $20,500 into a 401(k) or Roth 401(k). This increases to $22,500 in 2023. Those who are aged 50 and over can make an additional $6,500 catch-up contribution in both 2022 and $7,500 in 2023.

There are also contribution limits based on the total amount an employer and employee can contribute to the account together. In 2022, this limit was the lower of the employee’s compensation or $61,000. In 2023, this limit increased to the lower of the employee’s compensation, or $66,000. Both of these limits are also subject to (and can be increased by) catch-up contribution increases for those aged 50 and older.

401(k) Income Limits

There is also a limit to the amount of your compensation that can be taken into account for determining your and your employer’s contributions. The IRS limit is $330,000 for 2023, up from $305,000 in 2022.

Understand Retirement Account Options – IRA

A traditional IRA provides a tax deduction in the years that you make contributions, meaning the contribution amount reduces your taxable income to an IRA. However, in retirement, the withdrawals or distributions are taxable at your income tax rate in the year of the distribution.

A Roth IRA is an IRA that allows certain distributions to be made on a tax-free basis assuming specific conditions have been met. However, Roth IRAs do not provide a tax deduction in the years they’re funded, meaning they’re funded with after-tax dollars.

For both Roth and traditional IRAs, your distributions can begin at age 59½ and not before‚ although there are exceptions. If you withdraw IRA funds before age 59½, you’ll pay a 10% penalty tax in addition to paying federal income taxes on the distribution amount; and possible state taxes as well.

IRA Contribution Limits

The Internal Revenue Services (IRS) limits how much you are allowed to contribute each year to an IRA and a workplace retirement plan. The annual contribution limit for both traditional and Roth IRAs is $6,000 for 2022 and $6,500 for 2023. In both years, individuals aged 50 and over can deposit a catch-up contribution in the amount of $1,000. 

There’s a penalty for over-contributing—called excess contributions by the IRS—which are taxed at 6% per year for each year the excess amounts remain in the IRA.

IRA Income Limits

It’s important to keep in mind that some IRAs, specifically Roth IRAs, have income limitations established by the IRS. You could be prohibited from contributing, or your contributions could be phased out, depending on your tax filing status and income. Below are the 2022 and 2023 Roth IRA contribution limits.