For those entering the workforce or those that have been working for years, but only now have the capacity to begin saving for retirement, figuring out where to start can feel like a daunting task for many. Questions like “What type of account should I use?” “What is the difference between a Roth and a Traditional retirement plan?” “How much should I contribute?” and “What investments should I choose?” are common and can be overwhelming. Let us try to offer some structure to help you get started.
The first step is to determine how much you can comfortably afford to put away for retirement. While saving as much as possible is usually a good idea, one must be mindful of the consequences of overdoing it. Saving into tax-favored retirement accounts can provide tremendous benefits later in life. However, if you need to tap into those accounts prematurely, you will likely be faced with penalties and income tax consequences.
Once you have determined a comfortable savings amount, you should evaluate the retirement plans that your employer offers. 401(k) and 403(b) accounts are the most common offerings. Many employers will offer their employees some sort of incentive to contribute to an account. This incentive usually comes in the form of a matching benefit. For example, a company may offer to match 50% of your contributions on the first 6% of your earnings that you contribute. If you do the full 6%, the company adds another 3%. Look to maximize this benefit, even if this is all that you can afford… it is FREE money!
Employer sponsor plans oftentimes offer the choice of contributing to both Traditional and Roth accounts. The difference between the two is taxation and the timing of it. With Traditional accounts, any contributions that you make are done on a pre-tax basis. Translation: you get to deduct your contributions from your income now (thus reducing current tax liability). However, when you take funds out of the Traditional account in the future, the withdrawal is 100% taxable. Compare that to a Roth account, where contributions are made on an after-tax basis. There is no deduction from your current income, but assuming compliance with the rules governing Roth accounts, withdrawals from the Roth in future years are 100% tax-free. For many people, contributing to a Roth and foregoing the tax benefit now is well worth the tax savings later on. In the instance where you have additional savings capacity after contributing sufficient dollars to your employer-sponsored plan to achieve the maximum company match, consider exploring a Roth IRA next. The ability to contribute to a Roth IRA is limited by income. In 2024, a single taxpayer can have an income of up to $146,000 before the ability to contribute begins to phase out. Once income reaches $161,000, a single taxpayer is precluded from making any contribution to a Roth IRA. For married taxpayers, these limits are $230,000 and $240,000, respectively. Many workers as they advance in their careers could exceed these limits. Best to take advantage of an opportunity today that may not be there tomorrow. In 2024, those under age 50 can contribute $7,000 to a Roth IRA and those over 50 can contribute $8,000.
For those that still have excess saving capacity, contributing additional funds to the employer-sponsored plan until that maximum amount is reached ($23,000 in 2024 with an additional $7,500 allowed for those over age 50) is usually the best choice.
In terms of how to invest the funds in the various retirement accounts, that will vary from person to person depending on one’s risk tolerance. Generally speaking, the longer one’s time horizon is before needing the funds, the more aggressive (equity-heavy) the investments should be. The power of compounding growth can be huge! As with all planning-related matters, there may be nuances to everyone’s situation that may warrant tweaking this approach. At the very least, this is an approach that may fit a wide variety of savers. If you or someone you know needs help with navigating these options, please don’t hesitate to call us. We are here to provide guidance and support as you plan for your retirement. Contact us at 847-495-2464 or info@TrifectaCapitalAdvisors.com.
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A Roadmap to Saving for Retirement
For those entering the workforce or those that have been working for years, but only now have the capacity to begin saving for retirement, figuring out where to start can feel like a daunting task for many. Questions like “What type of account should I use?” “What is the difference between a Roth and a Traditional retirement plan?” “How much should I contribute?” and “What investments should I choose?” are common and can be overwhelming. Let us try to offer some structure to help you get started.
The first step is to determine how much you can comfortably afford to put away for retirement. While saving as much as possible is usually a good idea, one must be mindful of the consequences of overdoing it. Saving into tax-favored retirement accounts can provide tremendous benefits later in life. However, if you need to tap into those accounts prematurely, you will likely be faced with penalties and income tax consequences.
Once you have determined a comfortable savings amount, you should evaluate the retirement plans that your employer offers. 401(k) and 403(b) accounts are the most common offerings. Many employers will offer their employees some sort of incentive to contribute to an account. This incentive usually comes in the form of a matching benefit. For example, a company may offer to match 50% of your contributions on the first 6% of your earnings that you contribute. If you do the full 6%, the company adds another 3%. Look to maximize this benefit, even if this is all that you can afford… it is FREE money!
Employer sponsor plans oftentimes offer the choice of contributing to both Traditional and Roth accounts. The difference between the two is taxation and the timing of it. With Traditional accounts, any contributions that you make are done on a pre-tax basis. Translation: you get to deduct your contributions from your income now (thus reducing current tax liability). However, when you take funds out of the Traditional account in the future, the withdrawal is 100% taxable. Compare that to a Roth account, where contributions are made on an after-tax basis. There is no deduction from your current income, but assuming compliance with the rules governing Roth accounts, withdrawals from the Roth in future years are 100% tax-free. For many people, contributing to a Roth and foregoing the tax benefit now is well worth the tax savings later on.
In the instance where you have additional savings capacity after contributing sufficient dollars to your employer-sponsored plan to achieve the maximum company match, consider exploring a Roth IRA next. The ability to contribute to a Roth IRA is limited by income. In 2024, a single taxpayer can have an income of up to $146,000 before the ability to contribute begins to phase out. Once income reaches $161,000, a single taxpayer is precluded from making any contribution to a Roth IRA. For married taxpayers, these limits are $230,000 and $240,000, respectively. Many workers as they advance in their careers could exceed these limits. Best to take advantage of an opportunity today that may not be there tomorrow. In 2024, those under age 50 can contribute $7,000 to a Roth IRA and those over 50 can contribute $8,000.
For those that still have excess saving capacity, contributing additional funds to the employer-sponsored plan until that maximum amount is reached ($23,000 in 2024 with an additional $7,500 allowed for those over age 50) is usually the best choice.
In terms of how to invest the funds in the various retirement accounts, that will vary from person to person depending on one’s risk tolerance. Generally speaking, the longer one’s time horizon is before needing the funds, the more aggressive (equity-heavy) the investments should be. The power of compounding growth can be huge!
As with all planning-related matters, there may be nuances to everyone’s situation that may warrant tweaking this approach. At the very least, this is an approach that may fit a wide variety of savers.
If you or someone you know needs help with navigating these options, please don’t hesitate to call us. We are here to provide guidance and support as you plan for your retirement. Contact us at 847-495-2464 or info@TrifectaCapitalAdvisors.com.