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Live and Learn

Personal finance topics with a real world touch... 
and puns, because they make everything more amusing.

Go ahead, help yourself

Your future self called; they want some money. Help them out by sorting out options to save for retirement. This is for information purposes only and is not to be construed as an endorsement of anything or investment advice.

401 (k)

This is a retirement savings plan funded by employees and often matched by contributions from the employer. Contributions are usually made before taxes and grow tax-free until withdrawn. The name comes from the tax code that governs them. Nonprofits and associations may have a 403(b), state and local governments as well as self employed people will have something different, federal employees and military have access to a Thrift Savings Plan (TSP.) If your employer offers any kind of match, that's free money. If you are self employed, there is something called a Solo 401(k). You can get an employer contribution, but alas, you ARE the employer so it's not free money. But it is another option for saving more if that fits your plan.

Individual Retirement Account (IRA)

This is a retirement account that allows individuals to contribute a limited yearly sum toward retirement on either a pretax (traditional IRA) or after-tax (Roth IRA) basis. The limit is based on your income and can be found for any given year by googling "IRA limits [insert year]". The IRA you choose will be based on any income limits and when you opt to pay the taxes on the amount you are contributing (traditional you'll pay when you withdraw, Roth will be before you contribute.)

Many people wonder if they are better off contributing to a traditional or Roth IRA. Like much of investing, a crystal ball would be a fantastic tool. It would be nice to know what the tax laws are going to be in the future as well as what tax bracket your income will put you in. But alas, we don't have that information. Many people opt for a Roth IRA when they are younger and in theory making less money (which means they believe they are in a lower tax bracket now than they may be in the future.) Everyone's situation is unique so unfortunately there is no easy answer about what to choose.

For self employed individuals, there is something called a SEP IRA. Self-employed people or small-business owners with no or few employees can utilize this option. Between your investment advisor and a tax professional, you'll be able to sort out what is the right option for you.

Can I contribute to more than one retirement plan?

For most people, yes. You can participate in your employer's plan and have your own IRA. If you have money to put towards retirement, conventional wisdom suggests that you contribute to an employer fund up to the amount that they will match (again, that's free money, people!), then fund your IRA up to the limit, and then go back to your employer plan with any additional money your have to put away for retirement. As a solopreneur, you will have rules dictating how much you can save and where. Again, your investment advisor can help you sort it out.

How much do I need to save?

I'm not going to get into guessing how much you may need for retirement; there are calculators online and paid professionals to help you with that. I'll just say that your future self would really like some income. Preferably more than less. So help them out and save as much as you can. How you do it is completely up to you.

Please remember that no information in this blog shall be construed as investment advice. If you want to figure out how to find money in your budget to invest, or need help getting ready to meet with an advisor, hit me up.

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