If you’ve ever been envious of someone getting free money in their retirement account from an employer that “matches” contributions, you might be interested in how to qualify for matching without an employer! Even if you get employer matching, an IRA match is a nice extra benefit to boost your retirement account.
This post will explain how individual retirement account (IRA) matching works and where to find an IRA that offers it. So, stay with me if you like the idea of getting free money to grow your retirement nest egg!
What is an IRA match?
An IRA match is a deposit to your account from your IRA provider in addition to the funds you contribute. The goal of matching, whether from an employer or an investing company, is to incentivize you to save more and build a larger retirement account.
Robinhood was the first company to offer an IRA match, starting in 2023. It was innovative because matching is typically only provided to employees with a workplace retirement plan, like a 401(k) or 403(b).
That means anyone with earned income, including the self-employed, can get extra matching funds on their Robinhood IRA. Other companies, like Betterment and SoFi, have recently offered IRA matching. So, I’d bet we’ll see the trend catch on with more investing firms.
How does an IRA match work?
Let’s review how a typical IRA match works so you know if it’s a good choice for you. With Robinhood, they match 1% on contributions, transfers, and rollovers with no caps–or 3% if you have their premium Gold account, with no caps.
Let’s say you roll over funds from an old 401(k), and the account is worth $100,000 after the transfer settles. Your Robinhood match would be 1% or $1,000 if you don’t have a Gold account. You typically receive the funds right away.
The only catch with Robinhood is that you must own the account and hold your eligible contributions for at least five years to keep the match. Or, you must keep a Gold membership for at least one year from your first 3% match to keep the extra 2%.
Betterment’s IRA matching is 1% on contributions to a new or existing account through 2024–but not on rollovers or transfers. So, your match is capped by the 2024 contribution limit of $7,000 or $8,000 if you’re over 50. Depending on your age, you can earn up to $70 or $80, which Betterment says will be paid on or around December 31, 2024.
Does an IRA match count toward the contribution limit?
The good news about IRA matching funds is that they don’t count toward the annual contribution limit. For instance, If you’re a Betterment customer over 50 and contribute $8,000 to a Roth IRA for 2024, your total deposits for the year would be $8,080. The extra $80 match gets treated as interest income in your IRA, not as a contribution.
Is an IRA match the same as a 401(k) match?
While an IRA match might sound similar to a 401(k) match, they’re not the same. As I mentioned, an IRA match isn’t tied to an employer but to an investing company or platform.
Nor does an IRA match count toward your annual contribution limit. Workplace retirement plans have a much higher contribution limit: $23,000 or $30,500 if you’re over 50, for 2024. An employer’s match doesn’t count toward your annual contribution limit. However, you and your employer can’t contribute more than $69,000 combined, or $76,500 if you’re over 50.
A typical employer match could be up to 3% of your salary. For instance, if you make $100,000 and contribute at least $3,000 to a 401(k), your employer would kick in another $3,000 on your behalf.
You can have both a workplace retirement plan match and an IRA match. However, depending on your income, you may not qualify to make Roth IRA contributions. Also, contributions to a traditional IRA may not be tax-deductible when you or a spouse participate in a retirement plan at work.
Is it worth getting an IRA match?
Getting a 1% IRA match may seem like little. Still, if you maxed out a Robinhood IRA annually, it could grow into an extra five figures, depending on your return, the future contribution limits, and how long you own the account. The beauty of investing is that small amounts compound, helping your account grow significantly over time.
A downside of IRA matching is the possibility of getting it revoked or having a fee if you make withdrawals before a required holding period or have a balance below a certain threshold. I mentioned that Robinhood requires you to keep an IRA with matching for at least five years, otherwise there may be an early removal fee for withdrawing funds before then.
Before choosing an IRA with matching, compare it to other providers without a match. Some may offer nice perks like a welcome bonus or free account management if you deposit up to a threshold.
Before we go, I want to thank Jacey Saige for her recent TikTok post about the show! She makes great money and budgeting content, so check her out if you’re on TikTok.
This article originally appeared on QuickandDirtyTips.com and was syndicated by MediaFeed.org.
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5 Signs You’re Ready to Retire Early
Whether you’re feeling stressed out by a high-pressure job or dreaming of a different lifestyle, getting ready for retirement sooner rather than later is a wise money move!
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Most people qualify for Social Security retirement benefits as early as 62, and some get pensions from their old jobs, but you typically also need your own assets to fund a comfortable retirement. Building a nest egg means investing regularly with enough growth to cover your estimated future expenses after you no longer earn an income.
But what if you’ve been a good saver and want to retire early? This post will review tips for knowing if you can retire early and how to avoid paying hefty penalties when tapping a retirement account early.
Achieving an “early retirement” depends on how you define it. You may want to retire from your current job by working part-time in the same field. Or, you may want to start a more fulfilling but less lucrative career.
Early retirement could mean working for yourself, volunteering, or relocating to a less expensive country that allows you to stretch a dollar. So, I encourage everyone to aim for early retirement. Then, if you’re healthy enough to continue earning an income into your 60s, 70s, and beyond, you can build even more financial security if needed.
But knowing when or if you can start earning less or stop working altogether is more of an art than a science. Use these six steps to tell if early retirement is possible for you.
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The first step to knowing when you can retire is determining your typical or desired spending. Start by adding up your living expenses, such as housing, food, insurance, medical bills, and transportation.
Some of your expenses will likely decrease in retirement, but many, such as hobbies, travel, and health care, could go up. Remember that you don’t qualify for Medicare health benefits until you are 65. So, be sure to budget for health insurance, which can be surprisingly expensive.
A typical inflation rate, such as 2% or 3%, must be factored into all your average costs. While you can’t know precisely what inflation will be or what you’ll spend in the future, you need an estimated budget to determine your retirement savings target, which is the next step.
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Once you estimate your retirement spending, such as $100,000 per year, you can calculate your target savings goal. It depends on many factors, including:
- Your retirement age
- Your life expectancy
- How much you plan to spend or withdraw
- How much income you earn in retirement
- Your average pre-retirement investment return
- Your average post-retirement investment return
- Your home state in retirement
As I mentioned, the earliest you can begin collecting Social Security retirement benefits is 62. So, until then, your savings and any pension income generate all your income.
A mistake many early retirees make is withdrawing too much from their investments and having to return to work later on. A general rule is that when you retire at a typical age, such as in your 60s, withdrawing 4% to 5% annually from your investment portfolio should ensure you never run out of money.
Early retirees must withdraw less, such as 2% or 3%, depending on their age and ability to earn future income, to make a nest egg last a lifetime. For example, if you want to retire at 50 and believe you’ll live until 90, you’ll need income for 40 years.
Your income in early retirement would come exclusively from your investments from age 50 to 62 if you take early Social Security. Or, if you delay Social Security to 70 when your benefit is as high as possible, you’d withdraw income from your investments from 50 to 70.
Let’s say you need $100,000 a year from your investments using a 2% withdrawal rate. That would require a $5 million ($100,000 / 0.02 = $5,000,000) portfolio. However, if you have a pension that pays $60,000 starting at 50, you’d only need to withdraw $40,000 from your investments. Using a 2% withdrawal rate, you’d need a $2 million nest egg.
It’s possible that you could withdraw a higher percentage if your Social Security benefit is significant, you relocate to a low-cost country, or you expect to receive an inheritance.
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If you want to retire early but struggle to build an investment portfolio, the trick is starting early and being consistent for as long as possible. If you haven’t started, please don’t wait for the “right” time to invest because it doesn’t exist.
No matter what’s happening in the financial markets, your money can’t grow if you sit on the sidelines. Every day of investment growth matters, especially when you want an extra-large nest egg to retire early.
My favorite way to invest is to put it on autopilot so I don’t have to think about it. With any investment account, you can set up automatic contributions on a schedule, such as daily or monthly.
Increase your savings rate until it hurts, then reach a little higher! For example, If you’re investing 5% of your income, push it to 10% by the end of the year or increase it by 1% every month. Some investing platforms can even automate your savings increases so they happen on specific dates, such as January 1.
If you plan to retire early, don’t miss episode 829, 5 Steps to Achieve Fire (Financial Independence Retire Early), with various savings strategies. To accumulate enough for early retirement, you’ll need to save aggressively, such as investing at least 20% to 25% of your income.
Consider reducing unnecessary costs and cutting high expenses in your budget, like housing and vehicles, so you have more to invest. You can also create extra income by starting a side business or getting a second job to consistently boost your retirement account.
Early retirement is an aggressive goal you must pursue with gusto. It won’t be easy, but it’s possible.
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To save more and protect your future investment earnings, use tax-advantaged accounts, such as workplace retirement plans, IRAs, and health savings accounts (HSAs). They were designed to help you save and reduce your taxes simultaneously.
With a traditional retirement account (such as a traditional 401(k) or a traditional IRA), contributions are made pre-tax, and you pay taxes on future withdrawals of contributions and earnings.
If you can use a Roth, such as a Roth 401(k) or Roth IRA, your contributions are taxed, but withdrawals of contributions and earnings are generally tax-free. Having tax-free accounts to withdraw from in early retirement leaves you with more money to spend.
The allowable contribution limits for tax-advantaged accounts increase with the cost of living index, so check each year for the maximum amount and plan to hit it. If you max out these accounts first, you’ll get the biggest bang for your buck.
Also, claim as many legitimate tax deductions and credits as possible each year. These might include deductions for:
- home mortgage interest
- student loan interest
- state and local taxes
- charitable contributions
- medical expenses
- child tax credits
Working with a qualified tax accountant to maximize your savings and minimize your taxes can pay off. If you need clarification on tax-related expenses or have a complex situation because you own a business or rental property, always consult a tax professional.
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Tapping a retirement account before 59.5 typically comes with a 10% early withdrawal
penalty. A huge benefit of using a Roth is that withdrawals of your original after-tax contributions are always tax and penalty-free, making it an excellent option for early retirees.
However, your investment gains in the account haven’t been taxed. So, if you withdraw earnings from a Roth before age 59.5, those amounts would be subject to tax, plus the 10% penalty.
There is an exception if you have a workplace retirement plan and want to retire earlier. Once you’re no longer employed, you can use the “rule of 55” to take penalty-free withdrawals from your 401(k) or 403(b).
However, note that this rule doesn’t apply to IRAs; it only applies to workplace plans and solo 401(k)s. So, you’d need to leave the funds with your former employer’s retirement plan at least until you turn 59.5. Then, you could do an IRA rollover and take withdrawals from it.
For specific government workers, penalty-free withdrawals are allowed as early as 50. And if you have a 457 plan, there is no withdrawal penalty, regardless of age. However, amounts not previously taxed are always subject to income taxes.
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There’s also a little-known rule to avoid the early withdrawal penalty regardless of age. This exception goes by a few different names, including 72(t) payment plan, 72(t) distribution, and substantially equal periodic payments (SEPP).
The name 72(t) comes from its numbered section of the IRS tax code. The regulation allows you to set up a plan to take equal monthly or annual distributions from your retirement account, such as a traditional IRA or a Roth IRA. You can also set up a 72(t) distribution for a workplace plan, such as a 401(k) or 403(b) if you no longer work for your employer.
The amount you can withdraw using a 72(t) plan gets calculated using one of three accounting methods approved by the IRS using your account balance, age, and life expectancy. The payment calculation can be based on the amount in a single retirement account or the aggregate of all your accounts.
Be aware that a 72(t) plan has negative financial consequences if you don’t use it correctly. Once you begin taking 72(t) distributions, you must take the periodic payments for at least five years or until you turn 59.5, whichever is longer. In other words, if you start a 72(t) at age 50, you’d have to continue payments for 9.5 years.
After you complete a series of five-year distributions or reach age 59.5, you can take retirement distributions any way you like. However, for most traditional accounts, once you reach age 72 or 73, you generally must take annual required minimum distributions, whether you used a 72(t) plan or not.
Another consideration is that you can’t make new contributions to your retirement account or add rollovers while you take 72(t) payments. And, of course, all distributions that weren’t previously taxed will be subject to ordinary income tax.
Setting up a 72(t) payment plan is an excellent way to tap your retirement funds early without penalty. However, figuring out the allowable payment schedule can be complex, so get help from a qualified tax professional.
If your 72(t) distribution is too large or small, you may be subject to taxes, a 10% early withdrawal penalty, plus interest calculated from the original date you made an error.
So, before starting a 72(t), be sure you can afford the immediate cash flow and still have a nest egg that will last a lifetime.
This article originally appeared on Quickanddirtytips.com and was syndicated by MediaFeed.org.
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