Starting out your investment journey with a 401(k) maybe a popular way to save for retirement, but it isn’t the only choice you have. It’s good to get started, but you should not completely rely on your company 401(k). However, one should make sure to that he contributes the sufficient amount to avail full benefit of the employer’s match in the company 401(k). That’s the first wise thing anyone would do to save more for his retirement. Employer match should be taken with both hands; where else do you get free money these days?
It’s advisable that you exercise other investment vehicles such as Roth IRAs and Traditional IRAs after contributing up to your employers match limit in your company 401(k). Some employees get a 403(b) or a 457 plan, and these are similar to a 401(k). So, as long as you have a generous employer, don’t fail to contribute in your company 401(k). Once you start contributing as much as your employer is willing to match, next you should be looking at maxing-out on your IRA. This is a trickier one for most, as making a choice between Traditional IRA and Roth IRA isn’t easy.
If your employer isn’t generous at all, then your priority should be to start contributing towards an IRA.
If you are still young and confident about your career growth, then a Roth IRA is a far better tool to save for your retirement. Roth IRA allows you to take tax free distributions in your retirement, and you may even make withdrawals right after five years. A Roth IRA suits double purpose of paying taxes in advance at a lower rate, and keeping it as an emergency fund.
If you feel it’s already late and there isn’t any growth left in your career, then it’s likely that you will be paying taxes at a lesser rate as you close in your retirement. In such a scenario, you should be looking at a Traditional IRA as with a Roth IRA you will end up paying taxes at your current rate.
Before you can start saving for retirement, you should get rid of high interest debt as it is not possible to make more on your savings than you would be paying out as interest. Starting early is important, but debt load will not let you grow fast.
You could be hurting your retirement if you still cannot figure out which instrument you should use to save. The worst thing you can do right now is procrastinate. You must understand that compounding of interest loses its magic charm if you start late. So, if you start early, the money you contribute now would have grown many folds by the time you retire.
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