Retirement… Where should you be putting your money?
Very often people ask me where they should be putting their money for Retirement. Here’s the short answer, Contribute to your retirement in this order:
- 401K up to company match
- Roth IRA up to maximum contribution
- 401K up to maximum contribution
Need more detail?
A 401K is an employer-sponsored retirement savings program. 401K contributions are tax deductible which means that you are not taxed on what you put into it. So… assuming a 25% tax bracket, for every $100 dollars you put in, you get $25 off your taxes.
Find out if your company has a 401K program and see if they have a company match. If they do, basically you are getting paid to save money for retirement. For example, my company matches 50% for the first 6% of my income. That means in addition to my tax benefit, my company gives me $50 for every $100 I put toward my retirement. WHAT A DEAL! This is a no brainer. You’d have to be an idiot not to take advantage of it.
After contributing to the 401K up to company match, you should start up what is called a Roth IRA. You can start it up fairly easily at an investment company like Vanguard or Fidelity. Unlike the 401K, the Roth IRA provides no deduction for contributions, however, there are great advantages:
- All earnings are tax free when you or your beneficiary withdraw them
- You can take out the money you put into the Roth IRA (not the earnings) at any time with no penalty
- Unlike other retirement plans you don’t need to take minimum distributions after age 70.5
If you still have money after contributing the company match, you should contribute to your 401K so you can get more tax savings.
For more info on 401Ks and Roth IRAs go to IRS website at http://www.irs.gov/taxtopics/tc424.html and http://www.irs.gov/publications/p590/ch02.html