Every year at tax time, I ask clients if they want to do an IRA contribution. Many of them tell me: “Yes! But I don’t have the money right now. Next year for sure!” Then another year rolls around and I ask the same question and they say: “Yes! But I don’t have the money right now. Next year for sure!”
Sadly, if you don’t start now, you may not have enough money to retire. So, here are a handful of tips to help you break the cycle and start saving.
Are you an employee?
Get a recent paystub and look at it. How much money do you have going to your retirement plan at work? If you increased it 3% or 5% I bet you wouldn’t even notice it in your wallet and then your money is going to you rather than to the government. Even better… many employers match your contribution. That’s free money!
Are you self-employed?
Many self-employed folks fund their retirement in full at the end of the year (SEP IRA, SIMPLE IRA, etc) and many of them get pale when they realize how large of a check that is. Don’t be pale… be proactive! Make it a habit to move 5% or 10% (or more!) of your net income each month to a business savings account. Then at the end of the year, you’ll have the money set aside so it will be an easy to write that check.
Is your child working?
Many high school and college students get summer jobs. If they have earned income, they can make a retirement contribution. What if you helped them make a Roth IRA contribution at the end of the year? You will be teaching them early the importance of retirement saving and with the Roth, all the earnings are tax free! That’s free money!
How much should you put away?
I always vote for the max… but that max is dependent on your situation. If you are paying off high interest credit cards or student loans, then perhaps YOUR max is a little lower than the $18,000 that the government says you can put into your 401k. But, the answer is NOT zero. You should try and put a little bit away each year so it is part of your financial habit. And remember, a lot of your nest egg is not from your contributions themselves, but on the earnings you make on that money (and the earnings on your earnings). So the more years of earnings you have, the more you will have at 65!
Should you do a Roth or a Traditional?
The answer to this (like every tax question) is… it depends. With the traditional 401k or traditional IRA, you get a tax deduction now and pay tax when the money comes out. With the Roth 401k or Roth IRA, you get no tax deduction now but you take the money (and the earnings) out tax free. That’s free money! (Can you tell we like free money?) Your Enrolled Agent can walk you through the options and help you decide what is best for you.
Who is your beneficiary?
Now that you are funding your retirement, be sure that you review your beneficiaries on all your retirement accounts, especially if you’ve had a major life change like a divorce or marriage.
If you want more information about retirement savings or want to do a mid-year review of your tax situation, give us a call!