It may seem like a faraway concept, but it’s never too early to start planning for the next phase of your life. A great way to get started is with a 401(k)
Two of the most popular types of retirement accounts are 401(k)s and IRAs.
A 401(k) is a retirement plan that is sponsored by your employer. Each paycheck, your company will deduct a percentage of your salary, decided by you, and deposit it directly into your retirement account.
In a Traditional account, the money is taken out of your paycheck before taxes. Then, after you retire, you pay taxes on the funds every time you make a withdrawal. This type of account lowers the amount of taxes you have to pay over the year.
With a Roth account, you pay taxes before the money is transferred into your account. This means that you don’t have to pay any taxes when you make withdrawals in the future. If you think that your tax rate after you retire may be higher after retirement, this is a good option for you.
You also have the option to contribute to both a Traditional and Roth or you can convert if circumstances change. No matter which account you choose, federal law limits your annual contributions to $17,500 a year. If you are over the age of 50, you can choose to participate in ‘catch-up contributions’ which means you can deposit an additional $5,500 each year.
Many companies offer matching contributions, so make sure that you are taking advantage and maxing out your total contributions.
If you need to start a retirement fund or just have questions in general, look into hiring a professional. They can help you take a proactive approach to your personal financial situation and gain a better understanding of the financial concepts behind insurance, investing, retirement, estate planning, and wealth preservation.