Step#4: Start investing
in 401k plan or IRA
|Next is to start saving tax free with an IRA or 401k .
401k retirement plan. A 401k savings plan is often the best investment you will
have. IRA's and 401ks are tax free when you put the money into them and all
the investment income that the 401k or IRA generates is tax free. You only pay the taxes from the investments when you take the money out.
Most companies also have a 401k matching plan. What this means is that up to a certain % of your income, the company will match what you put into 401k retirement plan. So the savings on your investment can be tremendous. Say you put in $5000 over the course of a year and your company matches $.50 on the dollar. Now you have $7500 in your 401k plan. But really you've saved more than that because you would have had to pay taxes on the $5000. So what would have been, say, $4000 in your pocket has turned into $7500 in your 401k. This return on investment gets even better when the return you get on your 401k investments are also tax free. Over 20 or 30 years, you can potentially end up with $100,000's more in your 401k than you would have in a non-tax free account, while saving the same amount of money.
IRA's may not be quite as good as some 401k's because there is no matching, but they still are a great way to save for your retirement. You can look into ROTH IRA's as well depending on your age and financial situation.
It's always good to keep informed of the IRS tax rules around your 401k or IRA retirement savings plan. The IRS has maximum amounts you can put in per year. This maximum investment can change based on your age or your income. If you income is too high, you may not be allowed to contribute an IRA. If you are past a certain age, you may be allowed to contribute more to an IRA or 401k plan as a "catch-up". There are penalties for early withdrawal and ages where you must start withdrawing a minimum amount from the IRA or 401k plan. Also, there are IRA rollover rules to keep in mind if you are switching companies. All of these IRA and 401k rules change each year. It may sound complicated, but it's not too bad and well worth the effort to be sure you are maximizing the awesome tax advantages of IRA and 401k retirement savings plans.
How to choose an IRA and how to invest your IRA and 401k money is a good subject to take up with your professional financial advisor. Mutual funds, stocks, bonds, ETFs, etc. may all be good investment strategies for your 401k savings depending on your age and situation.