Holding off on saving for your retirement now – in the hopes of making up for it later – could be the costliest mistake you ever make. Regardless of your career situation, it’s never too soon, too late or too complicated to get started. The first step is finding the right retirement options available to you right now and funding them to their fullest potential.
If You Have an Employer-Sponsored Plan…
Find out if your employer offers 401(k)s, 403(b)s or similar retirement savings vehicles. Per current legislation, you can contribute up to $17,500 a year; after you turn 50, you’ll be able to play catch up with additional contributions of $5,500 per year.
Why Should You Take Advantage?
- Your employer might match your contribution. That basically equals “free” money, though it might take some time until you’re fully vested.
- Contributions can be deducted from your pay check either before tax or after-tax. Before tax contributions are deductible for tax purposes. Assuming an effective income tax rate of 15%, an $8,000 annual before tax contributions will only “cost” you $6,800 once the tax benefit is factored in. After-tax contributions are not tax deductible.
- In a traditional 401(k), your contributions (before tax) and earnings grow tax-deferred. Yes, you receive a tax deduction for your contribution today but you will pay taxes upon withdrawal. Keep in mind that you might be in a lower income tax bracket by then. In a Roth 401(k), your contributions (after-tax) and earnings grow tax-free. Qualified distributions are tax-free. If you expect to pay higher taxes in retirement, then this might be the better bet.
If You’re Self-Employed or Your Benefits Package, Um…Leaves Much to Be Desired
Then you should fund a Keogh plan, SIMPLE 401(k), SIMPLE IRA, or Roth IRA. If you’re single or filing as head of household and make less than $112,000 a year – or are married and make less than $178,000 combined – here are five more reasons to max out your Roth:
- The more you make, the less likely you’ll be able to fund a Roth IRA…so do it now!
- Contributions are made after-tax and max out at $5,500 per year (plus additional $1,000 for those 50 and older).
- Roth IRAs offer tax-free growth on earnings.
- Qualified distributions are entirely free from federal income tax.
- Depending on where you live, they’re also free from state income tax.
No matter what your job situation is, saving is always one of your top priorities. It’s neck and neck with paying off debt, and even a step ahead of other competing goals. Your financial future is up to you. Check in with a CPA to fund the best retirement plan for you right now, starting now.