Saving for Retirement: A Brief Overview
You’ve started your career. You’re paying your dues. And you’re making ends meet. The good news is, no matter where you are in your career, you can start making important steps toward securing your retirement – as immediately as on the very first day of your job. Don’t be intimidated by the prospect of saving for your retirement. Here are some common questions to help jumpstart the process.
What’s a 401(k)?
A 401(k) is an employer-sponsored savings tool that millions of Americans use to help prepare for retirement. In this plan, you make pre-tax contributions to your retirement plan through automatic deductions from your paychecks.
What are the benefits?
In addition to the potential for reduced taxes, your employer might “match” the contribution you make to your 401(k) to a certain percentage. A widely accepted rule of thumb is to contribute at least enough to get the full employer match if your employer offers one. If your employer matches the first 4% and you put in less than 4%, you’re essentially turning down free money. You don’t want to do that, right?
What’s an IRA?
IRA stands for Individual Retirement Account, which CNN Money described “basically as a savings account” with tax-advantaged features, making it a good way for some people to save for retirement. Similar to a 401(k), your contributions are not taxed until you withdraw the money; in fact, many people have both IRA and 401(k) accounts. One of the main differences from a 401(k) is that you have to open an IRA on your own, not through your employer.
Roth or Pretax IRA?
There are many things to take into account when deciding between saving via a Roth IRA or Pretax IRA. The simplest suggestion we can make is that if you think you’ll be making more money in the future than you do today, you may be better off choosing Roth – by paying the taxes now, the earnings will be tax-free in the future. To better understand the pros and cons of these option, RothIRA.com has a very helpful infographic that breaks down the difference between the two in further detail.
This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. It is intended to promote awareness and is for educational purposes only.
1 Source: CNN Money. Ultimate Guide to Retirement.
2 Source: RothIRA.com. The RothIRA.com Infographic