A few times over the summer I have written about looking toward the future. This has mostly come from the point of view of keeping a business moving forward, though. So this time, I wanted to spend some time thinking about your personal future and putting money aside for retirement.
First, this is obviously a good idea that everyone appreciates on some level. So if you have nothing put aside, start small. If you have some money siphoned out of your paycheck before it ever feels ‘real’ in your bank account, it is easier to get by without it than you think. You can then increase that amount every year (or more) and really start to build some momentum. This should be especially true if you get a raise of any sort. Add some of that increase to what you save. You then will be serving your future while still seeing more money in your paycheck.
For many, much of this future money is put into either a 401(k) or a Roth IRA. No matter which one you utilize and/or which one your job offers, the fact that it is a good idea to use it remains the case. They are not quite the same thing, though, when it comes to taxes.
From here on out, take everything in this article as generality and not as any sort of recommendation for your personal situation. Individual instances come with enough nuance that needs to be taken into account before making personal decisions. I still think this general information is good for when you start thinking your situation, though, and a lot of it is not always well known.
For instance, most people know that these types of accounts are meant for putting away money for the future, but that is about it. So the first thing I would you to take into consideration is if your employer offers any sort of match with that money. If they will also contribute money up to a certain percentage of your pay and you are not yet funding your account to that percentage, think about doing it. If you do not, that is essentially free money you are leaving on the table.
Next, the type of account you have comes with those differences in taxes I mentioned. If you are contributing to a 401(k), those funds are taken from your paycheck before incomes taxes are deducted. Essentially that means the money you put in there has not been taxed. This also means that the money will be subject to taxes when you take distributions from the account in retirement (or before, but that will come with a penalty for doing so).
In a Roth IRA, the funds placed in it come after your taxes have already been computed in your paycheck. That means the money placed in there has already been taxed, so you do not have to pay tax on it in the future when you start taking distributions. This is especially advantageous if you expect to be in a higher tax bracket when you retire than when you make the contributions.
That again tips off that the most advantageous way to use these accounts will vary on a person-by-person basis. So yes, use them, but if you are looking at how to use them best, don’t hesitate to set up a meeting with us to help discuss your situation.
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