The Friday following Labor Day has been designated as National 401(k) day. It is dedicated to reminding all working people about the importance of saving and investing to provide for a comfortable retirement.
Contribute Early
Your money should be working as long and as hard as you do. The earlier you start saving, the more time that money has to compound to provide financial security in retirement. We recommend all workers set aside a minimum of 10%, and preferably closer to 20%, of their income toward long-term goals. If this seems unattainable, start smaller and increase the percentage annually until you reach your desired level.
Take Advantage of Employer Matching Contributions
Most employers match their employees’ contributions by around 3%. For example, they may match 50% of your contribution up to 6%, which means if you contribute 6% into your 401(k) account, they will contribute 3%. Make sure that your contribution is sufficient to receive the full employer contribution. Don’t leave money on the table.
Savings is important even if your employer doesn’t have 401(k)
If your company doesn't offer a 401(k), you still can save for retirement through an IRA or Roth IRA. Self-employed individuals can take this a step further by establishing their own retirement plan. Types of plans include; solo 401(k), SEP IRA, SIMPLE IRA or a Defined Benefit Plan. The plan that is best for you will depend on your savings goals, budget, employees and other factors. Be sure to consult with a financial advisor before selecting a plan.
Roth vs Traditional
A traditional IRA or 401(k) involves tax-deferred contributions. Your taxable income will be reduced by the amount you contribute, but you’ll pay taxes when you withdraw money in retirement.
A Roth IRA or 401(k) does not provide the tax deduction on contributions, but your distributions in retirement are tax-free, including all your growth.
The Roth 401(k) provides a significant advantage because tax-free growth and withdrawals in retirement mean your distributions won’t be affected by future tax rates and may also save you money on your Medicare premiums.
If you have questions about which type of IRA or 401(k) is better for you, call us and we can analyze your situation to find the best solution.
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