Are you new to the retirement savings game? If so, hopefully we can help best inform you to get the most out of your retirement savings and investments. If you aren’t new to the retirement savings game then this is going to be a good refresher on some things you can do or should be doing now to get the most out of your retirement savings and investments.
Many newbies to the retirement savings game ask themselves, “Where should I save my retirement money?” This is a valid question and one that is very easily answered. You should be saving your retirement money into an IRA or 401k or both if possible. Why is saving in to an IRA or 401k the best option? Because these are retirement specific accounts. They help you maximize your retirement earnings by limiting the taxes that you will pay on the investments.
Are there different types of IRAs and 401ks? Yes, the two main types of IRAs and 401ks that are offered come as a traditional or Roth. How do they differ? They differ in the way you pay income tax. Traditional IRAs and 401ks tax you on the back end or when you withdraw the money from your retirement account in retirement. Roth IRAs and 401ks are the opposite of a traditional where you pay income tax you when you put the money in. There of course are other differences that you need to be aware. The general rule of thumb though is to use a roth if you have plenty of years to save and your earnings have a long time to accumulate and use a traditional when time is limited and you don’t have that many years to accumulate lots of earnings. Of course, speak with a tax attorney or accountant to get the best suggestion for your situation.
Now that you know a little bit more about a traditional account vs a Roth hopefully that will help you make more decisions as to what will work best for you.
One of the first things you should do to maximize your retirement potential is to check with your employment to see if they offer a 401k. If they do, you should then see if they offer a match. Typically, employers will match a certain percent of your retirement savings and typically they cap it a at a certain percent or dollar amount. Either way, figure out what the max amount that your employer can contribute to your account and then make sure you save enough into your 401k to obtain that match. If you fail to get your employer match then you are basically missing out on free money. Missing out on free money is a no-no and not a wise decision.
If a 401k is not offered at your place of business or if you have maxed out your employer contribution and still have money to contribute to your retirement accounts then saving to a IRA is a great option.
They are in theory very similar types of accounts except with a 401k your employer is in charge of your account and typically in charge of the types of investments that your 401k is invested in. With an IRA you work with a custodian and they invest your retirement money according to your liking. With most custodians you are limited with the types of investments you can choose. You can mainly only choose between stocks and bonds and other similar assets that are in the stock market. One thing that many people don’t realize when investing with their retirement is that you can actually invest in just about whatever you want. You can invest in real estate and gold if you want. You just have to have a custodian that allows you to do those types of investments. Many of these non-traditional investments are done through what is called a self-directed IRA.
A great thing especially for those who have a 401k and are maximizing their employer match but still have extra money that they can invest into retirement is to diversify your retirement investments. It is also a great thing for those who don’t have a 401k because investing with a self-directed IRA allows you to diversify your retirement into some real tangible assets like real estate and gold or if you would rather invest into something like private placements you can do that as well. Either way, investing into non-traditional investments with a self-directed IRA is smart to diversify your retirement account. You hear so many investment professionals talk about diversifying to limit your losses. This is a very smart principle to follow although many people don’t follow it as well as they should. Many times they just diversify through the stock market instead. While that is good to do why not diversify through the stock market and diversify outside of the stock market? It is best to have a truly diversified retirement portfolio!! Again, with a self-directed IRA this is possible.
If you are new to retirement investing there is a lot to think about but start thinking about it today and start taking action to make the best retirement possible for you.
Author: Nick Barker