“The question isn't at what age I want to retire, it's at what income.”
- George Foreman
We usually put off retirement thinking we’ve still have a long way to go before then. But the longer we wait, the more it’s hurting us! If you save $5,000 per year between age 20 and 30, and never save again until you are 65, you will have more retirement savings than the person who saved $5,000 every year between ages 31-65!
These are retirement plans offered by your employer. Any money you contribute to these plans is not taxed. The maximum contribution per year is $15,500 ($20,500 if you are over 50 years old). That sounds like a huge chunk of change. Why is 401K the first item on our retirement must-do list? Usually your employer matches a certain percentage of your contribution. What does that mean? Free money! For example, if your employer matches 100% of your contribution up to 5% of your salary, and you contribute 5% of your salary, then your money doubles! Immediately! No risk at all. So the first thing to do to jumpstart your retirement fund is to fund your 401K up to your employer match amount.
Roth IRA
Unlike the 401K, money that you put into a Roth IRA is after-tax money. The difference is that this money grows tax free, and it does not get taxed again when you withdraw it for your retirement. So if you expect your tax rate to increase when you retire, go for the Roth IRA. The maximum contribution is $4,000 for 2007.
Traditional IRA
This is the IRA where your contributions are not taxed until you start withdrawing. If you expect your tax rate to decrease when you retire, go for the traditional IRA. People who choose this generally have a valid reason – after retirement, they are not likely to have any other income. Their income brackets are lower than now and therefore, they are going to be taxed at a lower rate.
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