You have several options for savings for your retirement. How do you know what to do? Here’s one common approach:
First, contribute enough to your employer-sponsored plan to earn the maximum match.
Often, your employer will match your contributions up to a certain limit. Take advantage of the maximum amount of employer money by contributing the highest amount you are allowed to contribute. The advantages of this strategy include the employer match being “free” money to you and the match grows tax-deferred until you withdraw it (ideally when you use it during retirement). The disadvantage is that you might forfeit all or much of the employer match amount (and the earnings on them) if you do not work for that employer for a certain amount of time.
Second, contribute as much money to your employer-sponsored plan as you can afford.
You usually can contribute money to your employer-sponsored plan even beyond the amount that qualifies for the company match. Although you will not earn “free” employer money, your contributions are often contributed pre-tax, meaning you do not pay taxes on your contribution until you use it. This allows you to pay fewer taxes now and you have a higher dollar amount with which to earn tax-deferred earnings. The systematic payments from your paycheck are also less noticeable to you, so you are more apt to continue contributing. The disadvantage may be the choice of investment options you have.
Third, use IRAs to accumulate long-term savings.
If you have maximized your employer-sponsored retirement plan, you can still contribute money to a retirement vehicle that provides tax advantages. Individual Retirement Accounts, or IRAs, are available through a wide variety of companies, including many banks and financial companies. Depending on your other tax-free retirement activities, contributions to your IRA may or may not be tax deductible, but the earnings in a qualified IRA are always tax-deferred. Beginning in 2008, individuals can contribute up to $5,000 per year, (married couples $10,000 per year) to your IRA. If you are over age 50, you might also qualify to make an additional $1,000 per year in “catch-up” contributions.
Other options if you still want to save.
f the first three options do not get you to your projected goal, you have several other options from which to choose. Annuities and some life insurance policies can provide a savings vehicle and offer unique tax advantages as well. You might be interested in investing in stocks, bonds, or mutual funds. You also might be eligible for a salary continuation plan or nonqualified deferred compensation plan through your employer. Each of these options has certain tax implications that you will want to examine more closely before you use them in your retirement investment strategy.
Forefield, Inc.