Investing for Your Retirement
Many people wonder what financial tool they should get- a 401(k) or an IRA? The answer really depends on your income. If you are loaded with cash, you can contribute to both. The question you have to ask yourself is this: Are you in a position to pay tax today and earn tax free income during your retirement days or you would rather defer your tax liabilities. In a Roth IRA scheme, you have to pay your taxes pre-investment but enjoy retirement without tax liability. With a 401 (K), your investments are tax free on the way in but taxable on the way out.
A 401k is an option that is set up by your employer. They give you a select number of stocks and mutual funds to invest in and you can set the ratio you want to invest in. This is an optional plan. The money is taken out before taxes meaning your contribution is not taxed. However, when you retire, the money you take out is taxed so if you are in a higher income bracket than when the money went in you will have to pay more taxes than you would. But your money does grow tax free and many employers will match you contribution.
When you use a 401(K), you can invest up to 14,000 dollars per year. This number is inclusive of both your and your employer's contribution into the plan. This type of investment plan is really great when your employer contributes to it but since you will hopefully be in a higher tax bracket when you are older you should consider only investing up to your employer's match.
An IRA is for an individual person. It's just like owning a normal investment account as you can put the money in anything you want. You can hold cash, bonds, or stocks. The investment limit is $5000 a year for age 49 or below. The money you put in is after you paid taxes but it comes out tax free when you are older. However, you have to pay an early withdrawal penalty if you take money out before you are 59 1/2. You original contributions though are tax free at any time.
You should invest in both if you can but always invest in the 401k if your employer matches your contributions. You want to think about what your tax bracket will be when you are older too. If it will be higher, you would want to consider putting more money into an IRA. Both options are good and should be used but the balance of where you put the most money depends on the type of plan your employer offers and the amount of flexibility you want.
No matter what investment option you choose make sure you max out that option. Maxing them both out is better. That way you save the most money for your future and pay the least amount of taxes on it. Saving for your retirement is important and these two methods are the best way to do it. - 23212
A 401k is an option that is set up by your employer. They give you a select number of stocks and mutual funds to invest in and you can set the ratio you want to invest in. This is an optional plan. The money is taken out before taxes meaning your contribution is not taxed. However, when you retire, the money you take out is taxed so if you are in a higher income bracket than when the money went in you will have to pay more taxes than you would. But your money does grow tax free and many employers will match you contribution.
When you use a 401(K), you can invest up to 14,000 dollars per year. This number is inclusive of both your and your employer's contribution into the plan. This type of investment plan is really great when your employer contributes to it but since you will hopefully be in a higher tax bracket when you are older you should consider only investing up to your employer's match.
An IRA is for an individual person. It's just like owning a normal investment account as you can put the money in anything you want. You can hold cash, bonds, or stocks. The investment limit is $5000 a year for age 49 or below. The money you put in is after you paid taxes but it comes out tax free when you are older. However, you have to pay an early withdrawal penalty if you take money out before you are 59 1/2. You original contributions though are tax free at any time.
You should invest in both if you can but always invest in the 401k if your employer matches your contributions. You want to think about what your tax bracket will be when you are older too. If it will be higher, you would want to consider putting more money into an IRA. Both options are good and should be used but the balance of where you put the most money depends on the type of plan your employer offers and the amount of flexibility you want.
No matter what investment option you choose make sure you max out that option. Maxing them both out is better. That way you save the most money for your future and pay the least amount of taxes on it. Saving for your retirement is important and these two methods are the best way to do it. - 23212
About the Author:
Joe James gives financial advice for a living. He resides in the southwest of the United States and is a retirement specialist. You can find out more information at his website,http://www.financialinformationandadvice.com.
posted by X - Men @ 5:02 AM
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