Saving, in general, can be pretty difficult, and it can be even more difficult to commit to saving when you’re not saving for a specific purchase with a specific dollar amount. Retirement funds are probably the most familiar example of this sort of long-term, abstract savings practice, which means that it can be difficult to understand just how to go about saving for retirement.
Retirement fund plans themselves can certainly be confusing, too, and the strings of numbers and letters that they go by certainly don’t shed any light on the situation. While specific plans can be quite difficult to decipher and should be talked over with a financial professional, we can focus on three general options to give you a better understanding of how to save for retirement.
All of the jargon that goes into the different retirement fund plans can make it really tempting to just forget about all of these plans and save money on your own, and this is absolutely an option!
With enough discipline and practice, and enough disposable income, you can absolutely put money aside on your own and have your own retirement fund grow over time. Whether you decide this will be in a savings account, in property, or in some other form of assets, it’s pretty straightforward to see that this fund will grow directly as you put money in it.
The major disadvantage that this retirement fund plan has, however, is that the money never becomes tax-free. Because it isn’t put into an IRS-backed retirement fund plan, you will have to continue to pay taxes on this money throughout your life, which will severely limit the amount of growth you will be able to see in these kinds of funds in the long term.
Traditional Retirement Fund Plans
Traditional plans, like the 401(k), take a percentage of your income and put it into a retirement funding account. Some employers might offer a match, meaning that the employer will match some of your contributions into the account, which will help the assets grow much more in the long run.
The money in this account, as well as money that will continue to be added, is then left to grow over a long period of time. Traditional accounts typically can’t be accessed until a certain age without early withdrawal penalty fees, typically around the age of 60. This means that, even though you are letting money build up in your account, you can’t actually use it penalty-free for a long time. This makes sense in that the money isn’t meant to be used until retirement, but is an important thing to keep in mind, nonetheless.
The other important caveat to traditional retirement funds is that your funds will not be taxed until you decide to withdraw. On one hand, this means that the money that goes into the plan is exactly the money you’re paying since it isn’t taxed beforehand. On the other hand, this means that all of the built-up wealth will be taxed at withdrawal, which can end up being a fairly significant number.
This is an interesting Independent Retirement Account that has gotten more popular in recent years. The main difference between a Roth IRA and a 401(k), for example, is that you pay taxes upfront. This means that all of the money inside the account and all of the growth is completely tax-free.
What’s more, is that you can always withdraw your initial contributions completely tax and penalty-free since you’ve already paid taxes on these amounts. Qualified withdrawals will also come out tax-free.
The most attractive part of a Roth IRA is that the asset growth is completely tax-free. While you do have to pay taxes initially, after growth you know what you’re getting, whereas the taxes to be paid when withdrawing from a 401(k) can be surprising and unpleasant.
Plans that fall into any of these categories definitely have plenty more details to be explored. We recommend considering plans that fall into the latter two, as these are the strongest tools for long term asset growth. Consider talking to a financial planner to see exactly what plan works best for you.
There are other non-traditional IRAs, such as a gold IRA, that may interest you, but we will expand on those in another post.
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