Taxable amounts from retirement plans and after-tax annuities and withdrawals from retirement plan annuities may be subject to a 10% federal tax penalty in addition to ordinary income tax.
Retirement planning in 6 steps
These six action items can help you develop a plan for how you'll pursue your retirement goals.
1. Save early
Even if you're balancing other financial commitments, one of the best ways to save for retirement is to start as early as you can, even if it's a smaller amount. If you have a workplace retirement plan, try to contribute at least enough to take advantage of any employer matching funds. The earlier you save, the longer you have to take advantage of potential compound growth.
2. Save outside your workplace plan
Don't stop your retirement planning with your workplace plan. Consider a Traditional or Roth IRA to put away more money in tax-advantaged accounts. Or for more lifetime income options, an annuity may be the right choice.
3. Determine your budget
What will you do in retirement, and how much will it cost? An annual retirement budget can help you understand how much money you may need per year. Multiply it by 25 for a rough estimate of how much you may need over the course of your retirement. Don't forget items like healthcare!
4. Avoid the temptation of borrowing
If you need cash in an emergency while you're saving for retirement, try to avoid borrowing from your retirement plan. Look for other options. Borrowing from your retirement accounts may come with tax implications or financial penalties, plus it eliminates any potential growth on the amount borrowed before you've paid it back.
5. Decide when you'll take Social Security
If you can wait until later, your lifetime monthly benefit may be higher. Don't forget about any spousal benefits or other impacts from the program.
6. Take stock and look for gaps
Now that you know how much you'll need and what you're saving, use a calculator to determine how your savings may translate into income in retirement and whether you're on track to achieve your goals. If you're behind, look for ways to potentially catch up through additional contributions, or look for options that provide guaranteed income.