Saving for your future isn’t easy. College didn’t teach us anything, employers don’t provide any training, and most people older than us rarely understand the in’s and outs of investing. To make matters worse millennials are to scared to invest with a huge amount of student loan debt. But by taking advantage of the two most common retirement accounts you can set yourself up for a prosperous future. A future where you aren’t stuck working part time to pay the bills.
If you’ve decided to start saving for your future great job, it’s not easy to save for an event that could be 25-45 years away. But the earlier you start the more you will be rewarded. Unfortunately starting to save isn’t enough, you have to choose the right ways to invest. Savings accounts .001% interest won’t get you the lavish future you want. Instead you need to take advantage of Roth IRA’s and your employee sponsored 401K or 403B. Here’s why you should invest in both to have the most money possible for your upcoming retirement.
Top 3 Reasons to Invest in Your 401K
1. Your employer will typically contribute or match a portion of your contribution. This is essentially its free money from your employer. For example my employer matches up to $1,000/year, wouldn’t mind an increase! So I make sure to invest at least $1,000 each year so they contribute $1,000 as well. My $1,000 is now $2,000, doubled my money no problem. Other employers match a percentage of your salary instead of fixed amount. Usually they will match up to six percent of your contributions.
2. Your 401K contributions happen before you get taxed (pre-tax). You will be investing more for the same percentage than a post tax contribution.
- For example, if you invest 15% of your $2,000 paycheck then you will contribute $300 pre tax dollars. If you invested 15% after taxes it would be closer to the $190-$230 range (depending on your tax situation). BUT you will be taxed in the future when you begin to withdraw after 59 1/2 years old.
3. The last reason is that it will be AUTOMATICALLY deducted from your paycheck. Automatic contributions ensure you won’t spend all your paycheck before investing. You will pay yourself first! Listen to Warren Buffet = Net Worth of 66.7 Billion.
Three Reasons To Use an IRA
The disadvantages of the 401K are the advantages of the ROTH IRA.
Roth IRA’s use your post tax money
This means you have already been taxed, aka Uncle Sam has already taken his cut. To contribute to your IRA, the advantage is that when you cash out (after 59 ½) there are no tax implications! You can watch the money grow over time tax free. Even if you shuffle investments you won’t be taxed on you gains within in your IRA!
It can act as a 2nd emergency fund.
If something does happen in the future you can access this money much easier than a 401K. Of course there are penalties if you withdraw for reasons other than the ones listed here. You also have to have the account for the 5 Year Rule. It’s not as easy to dig into the funds as a savings account but still an option. Ideally you’d like to not touch your contributions as you can take advantage of compound interest.
You can invest in the funds you want
Roth IRA’s allow you to choose where you wan to invest. With a 401K you’re stuck with the funds offered through your employer. Usually the majority of options are high fee, limited selection compared to the thousands of funds available. Check out this ROTH calculator and plug in the details to get projections on your IRA!
Investing in both is great as you have essentially diversified your retirement accounts. You have free money from your employer, pre-taxed & post-taxed, and can access an IRA penalty free for qualifying expenses.
Contributing to both a Roth IRA and a 401K/403B can make it possible to save as much in tax-advantaged retirement accounts as the law allows. These accounts have tax advantages that help your savings grow faster and larger than they would in a non-tax-advantaged account. The more you contribute to your retirement savings accounts each year the more your future self is rewarded.
Also, it’s impossible to know what tax bracket you’ll be in at various stages in your retirement. Investing in both accounts gives you money that has been taxed and some that will in the future. This will allow you to strategize your distributions to minimize your tax liability for your retirement dreams.