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WIKI ANALYSIS
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This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it. |
Tips to Start Saving
Here are nine tips to help you save for your retirement:[1][2]
- Following the old adage, "pay yourself first" is the best way to grasp how to begin saving for your future. Consider your retirement savings as a "bill" that you must apply money toward each and every time you get paid.
- Live beneath your means to assure you have money to set aside.
- Start small. Then, each time you get a pay raise, no matter the amount, elevate the amount you are saving by 50% of the amount of your raise. Continue in this manner no matter what.
- Seek help from financial experts. Listen to what they have to say. Don't be swayed by fast-talking brokers with promises of making "big money."
- Do your own homework. Read articles about saving. Get word of mouth recommendations for financial advisors from friends, family members, and co-workers you trust.
- Set reasonable savings goals yearly. How much do you want to save next year? Figure a percentage of your net pay, divide it by the number of paydays for the year, and put that amount into your retirement account.
- Be sure you place the maximum allowable amount into your 401K to reap the tax benefits.
- Manage your debt carefully. In other words, borrow as little money as possible. Paying interest charged on your debt is money that could be going toward retirement savings.
- When planning for retirement, educate yourself about traditional 401(k) plans, traditional IRAs (Individual Retirement Accounts), and Roth IRAs. Talk with a financial expert who can explain the differences among these retirement savings plans. Then, select the plan(s) that will earn you the most money.
Types of Retirement Accounts
Traditional 401(k)s
A 401(k) is set up through your place of work and allows a specific dollar amount to be placed in the account yearly that is tax-free. What this means is that you will not have to pay taxes on any money placed in a 401(k) during the year, as long as you qualify by not exceeding the maximum allowable income. The maximum amount you can put in a traditional 401(k) is $15,500 for the year (as of this writing), although this amount varies, depending on the employer. The exception for depositing more than $15,500 is if you are taking advantage of the "catch up" allowed by law. If 50 or over, you can put in an additional $5,000 each year to catch up on saving for retirement.
Some employers provide contributions to the 401(k), once the employee is vested. Now, that's an offer that any money-savvy person simply should not refuse. Even if you don't stay long enough to get the employer contributions, the 401(k) is still a fantastic way to save. Be sure you contribute enough to receive the maximum contribution amount from your employer. After all, that's "free" money they are willing to give you, as long as you contribute up to the amount they require. The contributions are taken out of your paycheck, so saving is convenient and automatic.
If you withdraw your 401(k) funds before the age of 59-1/2, you'll have to pay a 10% fee on the amount withdrawn. Although there are exceptions to this rule, they are few and very specific. Upon turning 59-1/2, you can withdraw 401(k) funds without paying any penalty. At 70-1/2 years, you must begin withdrawing some money from the 401(k).
To set up a traditional 401(k) account, see the Benefits Manager at your workplace. For more specific information regarding traditional 401(k) accounts, see the Money/CNN website.
Traditional IRAs
With a traditional IRA, your tax advantage is upfront, you deduct the taxes you paid on the money you put in the account (as long as you didn't deposit more than the maximum allowable amount of $5,000 yearly). However, when you draw the money out years later during retirement, you must pay taxes on it. Those over 50 can contribute an additional $1,000 yearly to catch up, so that's a total contribution of $6,000 each year.
The traditional IRA can be a bit tricky when it comes to withdrawing funds. In fact, you are required to withdraw minimum amounts from a traditional IRA after you turn 70-1/2 years of age, or pay a penalty for not doing so.
To open a traditional IRA, you may go to your banker or a stock broker at a financial institution for assistance.
Roth IRAs
With a Roth IRA, you cannot deduct the taxes you paid on the money you deposited (as you can with a traditional IRA). However, the tax advantage for a Roth is at the back end, when you withdraw the money during retirement, you will pay no taxes on it since you already paid them upfront. The deposit limit is $5,000 per year, as long as you qualify (i.e. don't make over the allowable limit to have a Roth IRA). You have the option of placing an extra $1,000 yearly into your Roth account if you are over 50, as with the traditional IRA.
What's nice about a Roth IRA is that, after turning 59-1/2 years old, if you've had the Roth open for 5 years or more, you can withdraw the money without paying a penalty or any taxes. Alas, if you are under 59-1/2 and withdraw the money, you'll have to pay a 10% penalty on the amount taken.
As with a traditional IRA, a Roth IRA can be opened by visiting your banking institution or stock broker. Visit the Smart Money website for more facts about traditional and Roth IRAs.
Differences between 401(k)s and Roth IRAs
- The 401(k) must be opened through your employer while the Roth IRA is typically opened at a bank or other financial institution.
- Tax advantage for savings placed in a 401(k) is upfront. The amount placed in the 401(k) for the year is deducted from gross wages. The tax advantage for a Roth IRA is on the back-end. You must pay the taxes on the money you invested in the IRA but, years later, when you withdraw the money from the account, it will be tax-free.[3]
- With a 401(k), you and your employer contribute (as long as you meet your employer's requirements for when their contributions begin). A Roth IRA is comprised of funds only you contributed.
Other Accounts
Canadian Investment Accounts
References
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