While planning and saving for your retirement, there are some simple steps that you can follow to help put you on track for your goals. Although all savings is good, saving strategically is better.
I typically advise my clients to take the following steps:
Step 1. Retirement Plan at Work to The Match
Step 2. Maximize Roth IRA
Step 3. Maximize Retirement Plan at Work or Investment Account Based on Goals
First, contribute to your retirement plan at work (401(k), 403(b), TSP etc.) to take full advantage of the match. Many companies will match contributions up to 3% and beyond. This means that you if you contribute 3% of your income, the company will put in an additional 3%. This similar to a 100% return on investment or 3% additional annual compensation. The contributions made to the 401k are made pre-tax so you will get a tax savings now for each dollar you contribute. The growth in the account is tax deferred, this means you are not paying tax every year on the gains as you would in a taxable investment account. When you withdraw the money after 59 ½ in retirement, you will pay taxes on the withdrawals at your ordinary income tax bracket at that time. The tax savings and tax deferral are great benefits; however, the first step is all about the company match.
Once you have maximized the company match, you should begin saving into a Roth IRA. The contributions to this account are made after tax, and when you withdraw this money after 59 ½ the distributions will be tax free. In 2019, the maximum contribution to a Roth IRA is $6,000 per person ($7,000 if you are over 50). If you are married, you and your spouse can contribute $6,000 each for a total of $12,000 ($14,000 if you and your spouse are over 50). There are phase outs for contributing, this means that if your income is over a certain level you can no longer contribute directly to a Roth IRA. There are ways to still get this money into the Roth IRA even if your income is above the threshold.
Once you have taken advantage of your company’s match, and maximized the Roth IRA, the next step depends on your goals. If your only financial goal is to save for retirement, you should consider going back to your company’s retirement plan up to the maximum amount allowed. For 2019, the maximum contribution is $19,000 ($25,000 if you are over 50). If you have other goals such as education planning, or making major purchases such as a new home or car you may want to save in an investment account.
Saving for retirement can be complicated, now you have 3 simple steps to follow that should help you toward your retirement goal.