Saving for Retirement
Now is the time to open an account or increase the amount you’re investing for retirement. The best time to save is early in your working life, because you have time on your side. Small amounts of money, left to grow for years will be a huge retirement fund. If you save just $2,000 in a ROTH IRA earning 8%, when you are 18 years old it will grow to $92,000 by the time you are 66.
There are many retirement plan options. IRAs (Individual Retirement Accounts) and ROTH IRAs are used by many to save for retirement. Private companies offer 401(k) tax-sheltered accounts. Government, educational or non-profit organizations offer 403(b) or 457 plans. About 93% of employers match employee contributions so your employer might match some of your contributions. This is FREE money for your retirement!
IRAs & ROTH IRAs—compare the differences. IRA’s are funded with pre-tax money, so a contribution reduces your annual income and lowers your taxes NOW. You will pay tax on the IRA money your saved and the interest you earn when you withdraw funds in retirement.
You pay tax NOW on the income used to fund a ROTH IRA. The money you invest and the earnings on the ROTH IRA will be available for you to take-out TAX-FREE during retirement. A ROTH IRA beats a traditional IRA in the amount of taxes you save investing in the ROTH.
Maximum contributions. For the 2006 tax year, the maximum contributions to IRAs or ROTH IRAs are $4,000 for those under age 50. Over 50? There is a $1,000 catch-up, so you could invest $5,000 in an IRA or ROTH IRA. Eligibility for IRAs phases out at high incomes, but most workers can fund a ROTH IRA.
Investing in a tax-sheltered 401(k) or 403(b) plan? You can defer up to $15,000 if you are under age 50. There’s a $5,000 catch-up if you are over 50.
New in 2006 is the ROTH 401(k). Businesses that sponsor 401(k) plans may choose to add a ROTH 401(k) option. These plans permit after-tax salary deferrals by all participants without limits based on income. All the investment income accumulates 100% tax-free and qualified ROTH 401(k) distributions are 100% income tax-free. To qualify for tax-free withdrawals, you must have held money in the ROTH 401(k) for five years, be over the age of 59½, or upon the disability or death of the participant. These rules also apply to 401(k) plans.
Check with your human resources office to either enroll or update your contribution amounts. If you are self-employed or your employer doesn’t offer a retirement plan there are other options. Visit with your investment broker or consider CDs through your local bank or credit union. Whether you save the maximum or somewhat less, when retirement arrives – you’ll be glad you did!
(Information from Mary Snow, Family Living Specialist, Cherokee County Extension)
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