You don’t have to be an avid investor to have retirement planning on your radar. It’s part of “adulting,” getting your finances in order before you launch into your golden years.
Most people are familiar with employer-sponsored plans like the 401(k), but fewer than one in five American workers use this highly effective and supplemental retirement savings option.
Here’s what you need to know.
The Roth IRA: the yin to the yang of the 401(k)
First, everyone should take advantage of their 401(k) or similar retirement plan if their employer offers it. Most companies offer employer matching to encourage people to save for retirement. For example, let’s say you earn $100,000 and your employer offers you up to a 4% match. Your $4,000 contribution could be doubled by an additional $4,000 from your employer. That’s $8,000 for your retirement on just $4,000 of your salary. It’s free money, which makes a 401(k) at least worth investing for the game.
But after this match, investors might consider opening a Roth IRA. An individual retirement account allows workers to save for retirement outside of their employer-sponsored plans. It’s the opposite of a 401(k), because instead of investing pre-tax money, you contribute net money.
The beauty of a Roth IRA is that your already taxed contributions grow and you don’t pay taxes on the earnings when you withdraw them in retirement. Imagine your Roth IRA is worth $10,000 at age 25 and grows to $100,000 in retirement. These $90,000 in winnings are not taxed when you withdraw them. It’s a financial question game changer for retirees!
Follow the rules
Naturally, a good deal like the Roth IRA has rules to follow. For example, you can’t earn more than $153,000 in taxable income if you’re single, and married couples can’t earn more than $228,000. Higher earners can still contribute to a traditional IRA and even consider a backdoor Roth IRA to get around the income limits.
Additionally, you can only contribute up to a certain amount each year: $6,500 per year until you turn 50, plus an additional $1,000 for people over 50 who are trying to consolidate their savings before retirement. retirement.
Remember that retirement accounts such as a Roth IRA have rules to encourage people to save in good faith. There are potential penalties for withdrawing early, so invest money you know you won’t need and follow all rules for using Roth IRAs. That said, your contributions can be withdrawn at any time without penalty: it is income that is subject to stricter rules. Don’t hesitate to speak to a professional if you are unsure about making a decision.
This is why you should act now
It would be best not to procrastinate in incorporating a Roth IRA into your retirement planning for two reasons. First there is the general mathematics of composition. The more time you give your investments to grow, the larger your eventual nest egg should become. A 20-year-old will likely retire with more money and less effort than someone who waits until age 45 to start.
This is especially important for a Roth IRA because of contribution limits and rules. You can’t ignore a Roth IRA for years and then decide to spend tons of money later to catch up. Once your annual contribution window closes, it disappears forever. Someone who saves regularly in a Roth IRA from a young age accumulates years of contributions that cannot be recovered later.
Retirement planning is a personal and unique process for everyone. However, the benefits of a Roth IRA make it a useful hack that most people should at least consider.
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