It’s never too early to begin thinking about retirement. The earlier you start planning, the more likely you are to have a rewarding and trouble-free time during your retirement years. One key element of retirement planning is saving adequate money, and there are several advantageous ways to do just that.
In an effort to encourage people to save for the retirement, the U.S. government has worked with the financial industry to establish savings plans that are tax advantaged. All Americans can invest in such accounts and, if you are able to save money on a regular basis, it makes sense to look at these options.
More and more companies in the U.S. are enabling employees to invest in 401k accounts — in which a certain amount of money is deducted from your paycheck each month and deposited into your 401k account. Many companies offer matching contributions; if you must invest a certain minimum amount yourself in order to qualify for matching contributions, it’s best to do just that. Matching contributions, after all, represent free money to you. Once your 401k account is established, it’s up to you to invest the money as you wish — through whatever investment options are offered by your company — and to monitor your account, which will fluctuate with the markets depending on how they are invested. If you need help, your company’s personnel officer will be able to assist you.
Payments into a 401k account are generally pre-tax. For instance, if you have $75,000 worth of income in a given year and contribute $5,000 to your 401k that year, you will only be taxed on $70,000 worth of income. Also, your 401k account will grow tax-deferred. No matter how much accrues in dividend or capital gains income over the years, you are not taxed until you begin to make withdrawals, which are then taxed as regular income. Also, your account is subject to 401k contribution limits. These are adjusted from year to year (in 2011, the annual limit is $16,500), but do not include the amount of any company matching contributions. And all accounts are subject to a 401k early withdrawal penalty. You cannot withdraw funds penalty-free before age 59½; if, in an emergency, you wish to make an early withdrawal, your withdrawal may be subject to a 10 percent penalty.
Whether you have a 401k account or not, you can also invest in an Individual Retirement Account (IRA), which comes in two flavors: the regular IRA and the Roth IRA. In the first case, you can invest every year, up to a certain limit, and take a tax deduction on the amount of your investment. Your eventual withdrawals once you’re retired are then taxed as regular income. However, if you purchase a Roth IRA, you cannot take any tax deductions on your contributions, but your eventual withdrawals will be entirely tax-free. With both regular and Roth IRAs, your account will grow tax-free. For most people, a Roth IRA makes more sense; in either case, you’ll be substantially lessening your tax bill.
As with 401k accounts, there are IRA contribution limits. As of 2011, the limit is $5,000 per year for those under 50 years of age; for those 50 and over, the limit is $6,000.
If possible, take full advantage of these savings vehicles; during your years of employment, the value of your accounts will fluctuate with the markets, depending on how they’re invested, but over the years and decades they will grow and help you achieve a comfortable retirement.
An investment calculator can be a wonderful tool if you are contemplating investing but are not sure which scheme will give you the best financial rewards. With so many companies now advertising on the internet, it is easy to gain access to a great many investment opportunities.
Many companies who are available to handle your investments will feature an investment calculator on their website. These are usually easy to use and will give you an idea of what return you can expect if you put your money with them. The calculator is there to help you get a clear picture of what you can expect back after a certain length of time. There are many variables which you can enter into the equation and all of these can be taken into account when calculating the results.
IRA Calculator will help you determine:
IRA calculator helps you decide whether a Traditional or Roth IRA is best suited for your needs.
How much you need to withdraw each month once you retire to live comfortably
How much you need to contribute each month to maximize employer contribution for monthly retirement withdrawal goal
How you can forecast for your contributions’ affect on your retirement savings can be done through our online 401-K calculator.