Retirement

Why start now?
 

• The earlier you start saving, the more wealth you'll have available to meet your needs later.
• Grow your savings tax-free- the earnings on your retirement account aren't taxed until you take them out.
• You can’t borrow for your retirement like you can for your education, home or business.
• You can't rely on employers or the government for your personal long-term financial security.

Retirement savings checklist

• Start saving early to realize the greatest reward.
• Enjoy immediate tax advantages.
• Take advantage of any 401(k) plan with employer matching.
• Consider opening an IRA in addition to contributing to a 401(k).

Why is the power of compounding so important with respect to saving for retirement?

• Compounding occurs when interest is earned on interest that has accumulated over time on an investment.
• Retirement accounts benefit from tax-deferred compounding, so earnings generated are not subject to income taxation each year.
  
• You only pay income tax on the earnings in the year you withdraw the funds from the account.

Grow your money

Following are common retirement savings plan options:

1. 401(k) or 403(b): Employer-sponsored retirement savings plans (403(b) are government and not-for-profit organizations that allow you to invest pretax salary on a tax-deferred basis.

• You pay yourself first, putting some of your salary into the plan before any other deductions (e.g. income taxes).
• Your employer provides the investment choices available to you, typically a mix of mutual funds.
• Earnings in your account grow tax-free until you withdraw them.
• Some companies match a set percentage of your salary if you contribute an equal amount to the plan (for example, 2%) each pay period.

2. IRA: An individual retirement plan (IRA) - offers tax advantages to encourage people to save for retirement on their own.

Traditional IRA:

• You contribute to the account.
• If you meet certain parameters, you can take a current income tax deduction for your contributions.
• When you take distributions in retirement, you pay income tax on part of all of the distributions²

Roth IRA:

• You make after-tax contributions to the account.
• You do not take tax deductions for contributions.
• Your retirement distributions are tax-free if you observe distribution rules.

FAQs

1. How much can I contribute to a 401(k)/403(b)?

• Currently, up to $19,500 per year (or $26,000 if you are age 50 or older)

2. How much should I contribute to a 401(k)/403(b)?

• At minimum, contribute enough to obtain the percentage match from your employer. Ideally, contribute the maximum amount allowed each year to take advantage of pretax savings and compound earnings.

3. Why should I invest in an IRA?

• If your employer does not offer a 401(k)/403(b) plan, you should begin saving for your retirement on your own with an IRA. Currently, you can contribute up to $6k per year (or $7k if you are age 50 or older).
• If your employer does offer a 401(k)/403(b) plan, you may want to maximize your contribution there and then save even more toward retirement by contributing to an IRA.

4. Can I take money out before retirement?

• There is a 10% penalty for most withdrawals taken before you reach age 59 ½.
• In addition, you will need to pay income tax on your withdrawal.