401(k) PLANS AND IRAs IN 2022
Unless you’re fortunate to have parents or mentors to teach you how to retire financially independent early on, you’re like the rest of us who learned later in life. It isn’t until we land a nursing job that we discover there are different retirement vehicles, such as employer-sponsored 401(k) plans and IRAs, also known as Individual Retirement Accounts.
The truth is that nurses are experts in medicine, not finances, and it’s ok if you’re hearing the terms 401(k) or IRA for the first time. This article will cover the basics to be better prepared when talking with a financial representative or advisor. And no matter where you are in life, it’s never too soon or too late to start planning for retirement!
WHAT IS A 401K PLAN?
According to Investopedia, a 401(k) plan is a retirement savings or investment vehicle offered throughout the US. It is one of the most recognized retirement plans because many American employers provide it to their employees.
A percentage of your pre-taxed paycheck will go directly into this retirement account. As an incentive, an employer may match a portion of your contribution. A 401(k) contains investments such as stocks, bonds, and mutual funds that help your money grow. You can choose how you want your money invested. You can also consult with your 401(k) plan company representative.
REQUIREMENTS
- Start date
Your employer will specify when you can join the plan. For example, you may be able to participate on the first day of the calendar year following the completion of the required year of service.
- Years of service
Most plans require 1 to 2 years of service before participating in a 401(k) plan. Some employers determine your eligibility using hours served. Check with your employer’s HR department for details.
- Ownership
You may be required to put in one year of service with your employer to be considered 100 % vested. What this means is that what you contribute with your own money is yours, but vesting applies only to the portion of your retirement contributions that your employer matches.
BENEFITS OF A 401(k)
- You control your money
You have the flexibility to increase or decrease your contributions at any time. You also can be as aggressive or as conservative as you want.
- Employer matching
Your employer may offer to match a percentage or all of your contributions. What your employer matches is essentially free money.
- The contribution limit in 2022 for nurses under the age of 50
According to CNBC, the maximum amount you can contribute in one year is $20,500, which is $1000 more than in 2021.
- A higher catch-up contribution in 2022 for nurses ages 50 and over
Nurses over age 50 are eligible for catch-up contributions into their 401k. You can contribute additional money up to $6,500 above the $20,500 yearly limit.
- Tax advantages
You contribute with pre-taxed dollars, which lowers your taxable income. This means that you may pay less in taxes at the end of the year. Your money also grows tax-deferred, and you don’t pay taxes on it until you retire.
- Easy payroll deductions
Having your money automatically deducted from your paycheck makes saving effortless. It’s like how the saying goes, “out of sight, out of mind.”
- Portability
The money you contribute to and earn in your 401k is yours and can go wherever you go. For example, if you switch jobs, you can roll it over to your new employer’s 401k plan, roll it over to another tax-deferred retirement plan, or do nothing and leave it with your old employer. You choose! Be sure to check with a financial advisor to see what would be the best option for you.
A 401(k) is a great option to start investing in if you haven’t already. But what if the travel agency you work for doesn’t offer a 401(k) plan? The good news is that a 401(k) plan is not the only option. Another option is an Individual Retirement Account, or IRA can be an option.
WHAT IS AN IRA?
An IRA is a type of retirement savings account that has tax advantages. You can open an account on your own at almost any financial institution, such as a bank, investment company, or brokerage firm. There are two main types of IRAs a Roth IRA and a Traditional IRA.
ROTH IRA REQUIREMENTS AND BENEFITS
- Eligibility
You can contribute to a Roth IRA if your income is below a certain level. More specifically, your modified adjusted gross income and you’re filing status will determine if you are eligible. You can check the IRS website for more information. Please consult a financial representative or advisor for more information about your eligibility.
- Ownership
Your Roth IRA is yours. You have the flexibility to increase or decrease your contributions at any time up to the maximum contribution limit per year. You also can be as aggressive or conservative as you want.
- Contributions
You make contributions with after-tax money. In other words, you use money from your paycheck to fund your Roth IRA. Therefore, there is no immediate tax benefit for contributing.
- The contribution limit in 2022 for nurses under age 50
The contribution limit is $6,000 a year if you’re under age 50. Contribution limits typically change every 1 to 2 years.
- The contribution limit in 2022 for nurses ages 50 and over
If you’re age 50 and older, you can contribute up to $7,000 a year. Contribution limits typically change every 1 to 2 years.
- Taxes
Contributions into a Roth IRA are not tax-deductible.
- Withdrawals
- A required minimum distribution (RMD) states that you must start to withdraw from your retirement account each year at a certain age. However, there are no required withdrawals until after the owner’s death.
- If you’re 59 ½ or older and the account is at least five years old, you can withdraw your money tax-free and penalty-free. Other qualified distributions can be tax-free as well. Please consult with a financial representative or advisor for more information on what is considered a qualified distribution.
- Early withdrawals before 59 ½ are taxed as ordinary income, and there is a 10% penalty by the IRS. There are certain instances you can withdraw without being penalized. Consult with a financial representative or advisor for more information.
- Growth is tax-free
Your money grows tax-free. Roth IRAs continue to grow through compounding even during the years you can’t contribute.
TRADITIONAL IRA REQUIREMENTS AND BENEFITS
- Eligibility
Anyone with earned income can contribute to a Traditional IRA but with income restrictions that differ from a Roth IRA. Please consult a financial representative or advisor for more information about your eligibility.
- Ownership
Your Traditional IRA is yours. You have the flexibility to increase or decrease your contributions at any time up to the maximum contribution limit per year. You also can be as aggressive or as conservative as you want.
- Contributions
There are some ways you can fund a Traditional IRA.
- You can contribute after-tax dollars, but you have to inform the IRS that you’ve already paid tax on those dollars. Please consult with your tax preparer or tax lawyer for more information.
- You can roll over other retirement plans, such as a previous employer’s 401(k) plan.
- Contribution limits in 2022 for nurses under age 50
The contribution limit is $6,000 a year if you’re under age 50. Contribution limits typically change every 1 to 2 years.
- Contribution limits in 2022 for nurses ages 50 and over
You can contribute up to $7,000 a year. Contribution limits typically change every 1 to 2 years.
- Taxes
Contributions to a Traditional IRA can be tax-deductible. The IRS website explains when you’re allowed to claim your contributions as a deduction on your taxes. Please consult with your tax preparer or tax lawyer for more information.
- Withdrawals
- A required minimum distribution (RMD) for a Traditional IRA starts at age 72. Therefore, you must begin withdrawing from your Traditional IRA at age 72. There is a penalty for withdrawing after age 72.
- You can withdraw at age 59 ½ or older without restrictions or penalties. The IRS will treat your withdrawals as ordinary income, and it will be taxed.
- Early withdrawals before 59 ½are subject to taxes and a 10% penalty. There are certain instances you can withdraw without being penalized. Consult with a financial representative or advisor for more information.
- Growth is tax-deferred
Your money will grow tax-deferred. Any earnings you receive on your investment can produce gains of their own, and this type of cycle repeats itself having the potential to make more money. You don’t pay taxes on the growth until you withdraw money in retirement.
The goal is to empower you with some basic information about 401(k)s and IRAs. The good news? You don’t have to be an expert. That’s what financial advisors are for! So remember, no matter where you’re at in your traveling nursing career, you’re in the driver’s seat.
We hope you found these tips for retirement savings for travel nurses helpful.
