If you are not sinking money into a retirement account, you should be! In many cases consistently socking money into a 401(k) or similar account is a chance to make free money (company matching, tax incentives, etc). You should be doing this.
Which retirement account is best for you?
That depends on what stage of life you are at and what you are doing to make money. If your company offers one you should be putting your money into a 401(k) or 403(b) for educators. Even with a 401(k) you should consider opening an Individual Retirement Account (IRA). If you have twenty or so years until retirement think about choosing a ROTH IRA over the traditional. The difference is that you will have to pay taxes up front with the ROTH but your interest and ultimate withdrawls are not taxed. If you will be in a higher tax bracket this is a good idea.
Many companies have a matching plan for your 401(k). If your company has this and you are not making the maximum contribution you are throwing money away. Let’s use a hypothetical situation. Your company has a competitive retirement package, matching up to 5% of your salary at 100% each year. That means that if you are making $50,000/year you can put $2,500 into your account and your company will put in another $2,500. That is $2,500 of free money… that’s a pretty good bonus! But the financial benefits don’t stop there. Don’t forget that your contributions are made pre-tax which means your $2,500 doesn’t have the $700 taxes it would normally. You also have a smaller taxable income which could put you into a lower tax bracket. So is it worth maxing out your retirement contribution. If a $3,200 or more bonus each year sounds good than the answer is yes.
No company Match
So even if you aren’t getting matched by your employer you will see great tax advantages to investing in a 401(k), IRA, or other retirement account. These tax savings alone can make you hundreds of thousands of dollars in the long run.
Tyler is a husband and dad, professor, writer, web designer, and DIYer.
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