How to determine which retirement savings plan is right for you
We all know we need to save for retirement and that our best chance for long-term success is to start early and make it automatic. Unfortunately, figuring out how much to set aside—and into what type of savings vehicle—is a bit tougher.
However, once you understand these few basic principles of employer-sponsored retirement plans—most often 401(k)s—and other individual retirement account options, you can be on your way to a financially secure retirement.
Why and why not to contribute to your 401(k). If you’re lucky enough to work for an employer who offers matching contributions to a company 401(k) plan, sign up to do so. That’s free money. Plus your contributions help reduce your overall taxable income and provide tax-deferred growth on your earnings.
However, 401(k)s tend to be fairly limited retirement vehicles in terms of options, so once you’ve contributed up to the amount matched by your employer—or if your employer does not offer a match at all—you might want to consider opening your own individual retirement account.
Traditional and Roth IRAs. How your contributions are taxed is the main difference between traditional and Roth IRAs.
Traditional IRAs, similar to 401(k)s, allow tax-free contributions with a tax imposed on withdrawals. A Roth IRA, however, taxes initial contributions and then your distributions and all investment earnings can be withdrawn tax-free. That makes Roth IRAs particularly appealing to workers who may find themselves in higher tax brackets as they near retirement age.
Both traditional and Roth IRAs offer more flexibility and choice in terms of investment options and other costs when compared to employer-sponsored 401(k)s.
*For more information on employer-sponsored retirement plans and individual retirement accounts, contact a professional tax or financial advisor.
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