Worried about Retirement?
When you’re young, retirement seems light-years away. But that just means you have more time to sock away money for your golden years, preferably in savings vehicles that give you a tax advantage that can add to your retirement funds.
Here are some tax-friendly savings vehicles that will help your nest egg grow faster than you can say “I’ll take the early-bird special.”
Individual Retirement Accounts
IRAs are tax-sheltered retirement accounts that individuals can set up at financial institutions. There are two main types of IRAs, each with different tax advantages and withdrawal stipulations.
Traditional IRA: You contribute money that could be tax-deductible and earnings grow tax-deferred until you withdraw them at retirement. With a little luck, you’ll be in a lower tax bracket when you withdraw the IRA funds, so you’ll ultimately pay fewer taxes on the money. You must begin withdrawing funds at age 70 1/2.
Roth IRA: Instead of paying taxes when you withdraw IRA funds, with a Roth IRA you pay taxes on the money you invest and let it grow without having to pay any more taxes when you withdraw it. You’re allowed to withdraw your original contributions whenever you want without penalty, giving you more access to funds than in a traditional IRA. Another big difference is you can leave money in a Roth IRA for as long as you want. So, if you don’t need to dip into Roth IRA funds to finance your retirement, you can continue to let them grow — with no further tax burden — forever.
Employer-Sponsored Retirement Accounts
Generations ago, companies offered pension plans designed to take care of loyal employees in their old age. Today, fewer and fewer companies offer pensions, but they do help employees save for retirement through tax-sheltered vehicles and matching contributions.
401(k): This is an employer-sponsored retirement saving plan that invests a piece of your paycheck before taxes are taken out. This lets you invest more money over the long haul. Plus, most companies — in good times — will match whatever you save, up to a certain percentage. Of course, you’ll have to pay taxes eventually. That comes when you withdraw funds beginning at age 59 1/2. If you withdraw sooner, you’ll be subject to a 10 percent penalty in addition to the tax burden.
Some plans let you borrow money for major purchases, like a house. You have to pay it back, but you’re paying yourself, so it can be a great deal.
403(b): This is a tax-sheltered annuity plan specifically for public school employees and certain tax-exempt organizations. Retirement funds must be invested in insurance company annuities or mutual funds.
What’s best for you? Give us a call and we’ll take a look at your options and help you get started on reaching your retirement goals.