Photo by: Marissa Cribbs Photography
Let’s face it, planning for retirement isn’t nearly as colorful and exciting as planning for a wedding. But after the ink has dried on the marriage license, and you have rested up from the delightful chaos of the wedding, it’s time to sit down and have a real talk about how you are going to plan for your future together. You should act now, whether it be a big gesture or small, to ensure that you will be able to retire comfortably with the love of your life. Here are a few retirement savings accounts so that you can determine which plans fit your family best.
Individual Retirement Account (IRA)
Individual retirement accounts are funded outside of the workplace by individuals and are invested in stocks, mutual funds, bonds, and cash. You have control to diversify your investments or may consult with a professional on how to best diversify your portfolio. In most situations, an individual may invest up to $5,500 per year. There are two main types of individual retirement accounts, Traditional IRA and Roth IRA. The difference between the two is whether you prefer to pay taxes now or when the money is retrieved.
A Traditional IRA grows money tax-free and is tax deductible against taxable income within the year that it is contributed. There are some restrictions on the percentage of income tax deductions that can be made, primarily based on an individual’s filing status, income level and access to a 401k. Generally speaking, you get a tax break now and pay taxes on the money when you take it out later.
A Roth IRA is the most popular individual retirement account because it grows tax-free. You invest after-tax dollars and will not receive any income related tax deductions within the year that contributions are made. As long as you are 59 ½ years of age, no taxes will be incurred when you take money out. Roth IRA’s are a great option for young, low-earning individuals who have (investment) time on their side and anticipate to see a higher tax rate when they retire.
Employee Sponsored Plan: 401k
Many companies offer a savings option for you to consider as their employee. This means that they have consulted with a third party, created investment packages for their employees, and present you with the choices to pick from. In most cases, automatic payroll deductions are reallocated as deposits into the 401k (out of sight, out of mind). Some employers offer percentage matching incentives. For example, if you invest 3%, then they will match 2% of your contributions. There is no fear of losing your money because if you are no longer with the company, you can roll the balance into your new employers 401k or move it to a personal IRA.
Note: tax-exempt organizations will offer an employee a 403b and government-related positions will be offered a 457b plan.