Ahh, retirement. The greener pasture that lies ahead. But how do we keep that pasture green for the rest of your retirement? If you have doubts on how much you’re saving or how to save for retirement in the first place, keep reading to get the lo-down!
First thing’s first, how do you save for retirement? With these three easy steps, you’ll be saving for the future in no time.
How to save for retirement in three steps
- Free money
If your company offers an employer-sponsored retirement plan, like a 401(k), and matches any portion of the money you contribute, put your first savings into that account. If your plan doesn’t offer matching contributions, or you don’t have a workplace retirement plan, start with the next step.
- Contribute to an IRA
You can contribute up to $6,000 to an IRA each year (or $7,000 if you’re 50 or older).
- Max out your IRA
If you max out your IRA, return to your 401(k) or other employer plan and continue making contributions there.
Okay, but what is a 401(k) and IRA?
And wait, there’s a Roth IRA and a traditional IRA?
Let’s break down what these three investment accounts are for retirement savings.
Let’s start with the 401(k)
A 401(k) is a retirement savings plan that is sponsored by your employer. It lets employees save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
Some huge pros are how easy it is to save on autopilot. Money is taken out of your paycheck automatically, so you don’t even see it! A lot of employers also match a portion of employee contributions making them one of the biggest tax havens as the IRS lets individuals save more than 3x as much as in an IRA. Again, the investment gains are tax-deferred so as long as the money remains in the account, you owe nothing as it grows!
But not all that shimmers is gold. The investment choices for a 401(k) are limited. They’re picked by the plan administrator and selections are typically small. Fees can also eat at your returns. In addition to investment expenses (which are charged by the investments themselves, not the 401(k) plan), there may be administrative fees charged by the company that manages the plan.
The best way to invest in a 401(k) is to invest up to the match and pay attention to fees! The money you contribute to your 401(k) lowers your taxable income for the year and you get tax-deferred growth on investment gains.
What is a Traditional IRA?
A Traditional IRA is an individual retirement account that offers tax advantages to savers. The money you contribute is deducted from your taxable income, meaning the money you put into the account is pre-taxed. The taxes you’ll pay will be what you withdraw in retirement.
There’s no income limit to open and contribute to a traditional IRA! And you can use Traditional IRA money to pay for qualified college expenses without paying an early distribution penalty, although taxes are still a thing… You can also use up to $10,000 from a Traditional IRA toward the purchase of your first home as well!
However, if you tap into the money before age 59½, you’ll pay taxes AND a 10% early deduction penalty. You HAVE to begin taking distributions at 70½ and can no longer make contributions.
Let’s compare to the Roth IRA.
For the Roth IRA, contributions are not deductible as the account is funded with post-tax dollars. This offers you a tax benefit which raises the incentive to save! A Roth IRA is an account that holds your investments, which means you can select what you want to invest in, such as mutual funds, stocks, bonds and exchange-traded funds (ETFs).
It has all the benefits of a traditional IRA, but you get no upfront tax break as you do with the traditional IRA. The payoff comes later as withdrawals in retirement are not taxed at all.
Lucky for you, RMLEFCU offers options with the Traditional IRA and the Roth IRA and on top of that, Debby, our registered representative with LPL Financial, can offer you expert financial planning advice. RMLEFCU provides you with all the resources to plan a happy, healthy retirement. Give us a call now: (303) 458-6660.