Retirement Planning

There are various ways in which you can save for retirement. The most common method people know about is 401K. Some of the common options:

1. 401K - Traditional
2. 401K - Roth
3. IRA - Traditional
4. IRA - Roth
5. Rental Income - Buying Investment Property
6. Dividends - Investing in Shares with steady dividends
7. HSA

If you own a 401K or IRA account, you need to monitor the account and make sure that the money is invested properly as per your needs (based on your age and risk acceptance criteria). If you are not sure if you are investing right in your retirement account you may make use of third party services that take care of your account for a reasonable fee. One of the services is Bloom. You may try them free for a month and see if that makes sense for you.

Traditional 401K/IRA uses pre-tax money (don't need to pay tax on the invested money, they grow tax free, but you pay taxes when you withdraw). Roth 401K/IRA uses post-tax money (need to pay tax before investing in Roth account, they grow tax free and you can withdraw without paying taxes in retirement). There are limitations on who can invest in each and how much you can invest.

If your income limits you from contributing directly to Roth IRA, there are ways to contribute to IRA indirectly.

1. Roth Conversion Ladder - You move funds from traditional IRA to Roth IRA. This requires you to pay tax on the amount converted. This is called a ladder because, you convert smaller amounts each year so that you do not exceed the tax bracket for each year and optimize for tax.

2. Backdoor Roth - You contribute after tax dollars to traditional IRA and immediately move the funds to Roth IRA. You might ask, if IRS does not allow you to contribute directly to Roth IRA, how are you allowed to contribute to traditional IRA and immediately move it into Roth IRA. I don't know what is the reasoning behind this.

3. Mega backdoor Roth - You contribute after tax dollars to traditional 401K and immediately move the funds to Roth 401k. One thing to note is that, this option requires your employer 401k plan to allow after-tax contributions to traditional 401K and in-plan conversion. Some plans even allow you to convert to Roth IRA (though not automatically).

Buying investment property with rental income is another way to save for retirement. The rent pays for the mortgage and by the time you retire, the mortgage is most likely paid off and the rent becomes source of your monthly income. This requires proper planning and management of property. You need to get your numbers correct in order to find the right property. If you don't do your homework, you may end up in a property that eats away your savings.

Buyings shares with dividend income is for people who have the self control to invest in stable companies with long dividend history that will more likely continue to pay dividends. This is not for all. This comes with its own risks. You may lose your initial investment if you do not invest properly.

You can contribute to HSA account if you have a qualified high deductible plan. You can take tax free and penalty free contributions any time if used for medical expenses. The withdrawal can be take for past expenses (need not be current year). You may withdraw for non-medical expenses too after retirement, but you have to pay taxes if you do so. So HSA acts like a 401K with tax savings if used for medical expenses.

This is not a financial advice. Please contact a financial advisor for accurate information. Please research and make your own decision.