When It Comes To Saving For Retirement, There's No Better Time To Start Than Now

There’s no getting around it: Saving is hard. Right now, there are probably 100 more exciting things you would like to do with your money than save it. While retirement and other long-term goals may seem like distant dreams, time flies when you are having fun! And the longer you wait, the more challenging it becomes to realize the freedom you envision for yourself in retirement.

A tax-advantage retirement plan is a great way to start saving. And the good news is, you have plenty of options from which to choose. Below you’ll find general overviews of three of the most popular choices – please consult with your financial advisor for more information, to determine the best path forward for you.

A traditional IRA is an individual retirement account that allows individuals to contribute pre-tax dollars from earned income. Gains grow, tax-deferred, until withdrawals during retirement (at age 59 ½ or later). With a traditional IRA, you might be eligible for a tax deduction for your contribution.

You can set up your account at a financial institution, such as a bank or brokerage firm, and funds can be invested in stocks, mutual funds, and ETFs, to name a few investment choices. If you are in a higher tax bracket, this might be a good choice. For 2020, the max contribution is $6,000 for individuals under 50, and $7,000 for those 50 and older; required distributions must begin at age 72.

Unlike a traditional IRA, contributions made to a Roth IRA comprise after-tax dollars. You will not receive a tax deduction now, but your balance grows tax-free, and distributions taken at retirement are also tax-free. Additionally, you can withdraw contributions made to a Roth IRA before retirement age without penalty. You are also not obligated to take a required distribution at age 72; contribution limits, though, are the same as a traditional IRA.

These plans are employer-sponsored benefits that allow employees to contribute a portion of their wages to individual accounts. Contributions are excluded from the employee’s taxable income (some plans allow contributions to be made after-tax to a Roth 401[k]). Many employers offer a “match” for contributions made; for example, your employer might match 50%, up to a maximum employee contribution of 6%. So while you are saving 6% of your salary toward retirement, your employer will match half of that (3%). This match is essentially “free” money – you do not want to turn that away!

Some matching plans are on a vesting schedule, meaning you must work for an employer for a set number of years before the match option becomes available (though your contributions are always yours!). If you leave your employer before the vesting period, you will be forfeiting those funds – so it’s important to understand the vesting schedule. If you leave your employer, your 401(k) will stay with them until you decide what to do with it – on that front, it’s smart to consider your options. Two of the most common elections are to roll the funds over into your new employer’s 401(k) plan, or doing the same to an individual rollover IRA. You do not want to lose track of the account, as some plans will automatically cash you out if you do not move, which might end up costing you taxes and/or penalties.  

The bottom line, though – the main takeaway here – is to START SAVING NOW! Every little bit helps. We can help you start the process, understand which account is best, and even illustrate how your savings can grow. Please contact me or one of our other planners to find out how.