Save For Retirement: 3 Simple Steps
Tapcheck Team
May 13, 2022
What is a Retirement Fund?
A retirement fund is a savings account that you contribute to over the course of your working life so that you can comfortably retire one day. Although this sounds like a huge sum of money to accumulate over time, saving for retirement doesn’t have to be a daunting task. In this article, we will discuss different types of retirement accounts and talk about some steps that you can take to save for retirement.
Types of Retirement Accounts
The three most common types of retirement accounts are traditional IRAs, Roth IRAs, and 401(k)s. Let’s take a look at these different types of accounts, the variations between them, and the benefits of each.
Traditional IRA vs Roth IRA
A traditional IRA, or individual retirement account, is an account that allows you to make pre-tax contributions towards retirement. When the owner of the IRA retires, the withdrawals they make will be taxed at their current income tax rate. Some contribution and withdrawal limits may apply depending on the contributor’s age and income. For example, there is a $6,000 limit for those under 50 and $7,000 for those older than 50. Required minimum distributions must begin when the owner of the IRA turns 72.
Roth IRAs are very similar to traditional IRAs. The biggest difference is the way that the accounts are taxed. The contributions that you make to the account are taxed, but the withdrawals are tax-free. This is a better option if you think that your marginal taxes will be higher during retirement than they are currently. There is also an income limit for Roth IRAs. Singles who make more than $140,000 or couples filing jointly who make more than $214,000 will have to opt for a traditional IRA.
401(k) Basics
A 401(k) is a company-sponsored retirement account. Contributing to a 401(k) is like saving on autopilot, as, at your election, your company will automatically take a certain percentage out of your paycheck each time to add to this account. Sometimes, employers may match a percentage or even all of your contributions to a 401(k). Just like an IRA, there is a traditional 401(k) and a Roth 401(k). Contributions to a traditional 401(k) are done pre-tax, but withdrawals are taxed. Roth 401(k) contributions are taxed, but withdrawals are not.
3 Simple Steps to Save for Retirement
Now that you know a little bit more about the types of retirement accounts, it’s time to start making a plan to save for retirement. In three simple steps, you can be well on your way to making your retirement goals a reality.
- Take Advantage of Free Money: If your employer offers a percentage or full matching of contributions made to a 401(k) or any other type of employer contributed plan, take advantage of it! This is basically free money that you can add to your retirement, and it adds up faster than you might think.
- Contribute to an Additional IRA: If your company doesn’t offer a 401(k), or even if they do, consider contributing to an IRA. Planning for the future helps you down the road, but it can also offer some much-needed peace of mind today. To determine whether a traditional or Roth IRA is better, talk to a financial advisor to help guide you through the process.
- Start Early: The earlier that you start contributing to a retirement account, the more money you will have when you retire. Although that sounds overly simplified, if you make saving money a habit early in your career, you will have more for a comfortable retirement. Your future self will thank you!
Even if your retirement is several years (or even decades) away, there are steps that you can take today to set yourself up for success (while still being able to enjoy life). By saving just a little bit from each paycheck, you can hit your retirement goals and look forward to those work-free golden years that you’ve earned.
