It can be difficult to save money, especially if you aren’t saving for a specific purchase or a dollar amount. This type of long-term, abstract savings is most well-known. It can be confusing to figure out how to save for retirement.
Retirement plan plans can be confusing. The numbers and letters they use don’t provide any insight into the situation. Specific plans are not easy to understand and should be discussed with a financial professional. Instead, let’s focus on three options that will help you better understand how to save for retirement.
Non-Retirement Savings
It can be tempting to ignore all the details of retirement plans, which can lead you to believe that you can save your money by ignoring them.
You can save money on your own with enough practice and discipline, as well as enough income. This will allow you to build your retirement fund over time. It doesn’t matter if you choose to put it in a savings account or in real estate. The fund will grow as you add money.
This retirement plan does not have tax-free money. It is not put into an IRS-backed retirement plan. This means that you will continue to pay taxes on the money throughout your life. This will severely limit how much growth you can see in these types of funds over the long term.
Traditional retirement fund plans
Traditional plans like the 401 (k) take a portion of your income and place it in a retirement fund account. Employers might offer a match. This means that they will match some of the contributions to the account. This will increase the asset’s growth over time.
This account holds the money as well as any money that will be added to it. It is then allowed to grow for a long time. Traditional accounts can’t usually be accessed before a certain age, often around 60. Even though your money is building up, you cannot use it without penalty for a long period of time. While this makes sense as the money isn’t meant to be used before retirement, it is important to remember.
Another important point about traditional retirement funds is the fact that your funds won’t be taxed until withdrawal. This means that you don’t pay any taxes on the money you put into the plan. This also means that any wealth built up will be subject to tax at withdrawal. This can lead to a significant amount.
Roth IRA
This interesting Independent Retirement Account has become more popular in recent times. A Roth IRA is different from a 401(k) in that taxes are paid upfront. This means that the entire account, as well as all growth, is tax-free.
You can also withdraw your initial contributions tax-free and without penalty, as you have already paid taxes on them. Qualified withdrawals are also exempt from tax
A Roth IRA’s asset growth is tax-free. This is the most appealing part. Although you will have to pay taxes at the beginning, you can see what you get as you grow. However, taxes that you need to pay when you withdraw from a 401k are often surprising and unfavorable.
There are many details that can be explored for plans that fall within any of these categories. These plans are best for long-term asset growth and we recommend that you consider the second two. Talk to a financial advisor to find the best plan for you.
You may also be interested in non-traditional IRAs such as the gold IRA. We will discuss these in another post.
