If you haven’t already started saving for retirement, it’s time to start. The reality of the situation is that unless you are planning on working well past the age of 60, you can’t wait until you’re older to start your plan for retirement. The following are four tips to help you save for retirement effectively:
Open a 401(k) Account
If your employer offers a 401(k) plan you should be taking advantage of it. You can contribute a certain percentage of your paycheck to this account, saving a part of it aside for your retirement. If your employer matches your contribution, definitely be sure to fully take advantage of that opportunity, as it’s free money. If you leave your job, you have the option to leave the money in your old plan, roll it over to a new plan, take out the money or put the money into an IRA account. Also, there is a maximum annual contribution limit for your 401(k) and for 2013 it’s $17,500.
Open An IRA Account
If you don’t have access to a 401(k) account, you should consider opening an IRA account and you have two options: Roth IRA or a Traditional IRA. If you choose to go with a traditional IRA, it means that you don’t pay tax up front on your contribution, but you will pay tax on the money when you take it out. Roth means you pay tax upfront by investing with after-tax income, so your investment grows tax-free without needing to pay tax when you retire with the money.
Try a Backdoor Roth IRA
If you are not eligible to contribute to a Roth IRA because your income is too high, you can contribute to a Non-deductible Traditional IRA, then right away convert it to a Roth IRA. If you do this, the only tax you will need to pay is on any increase in value of your investment from the time you make your contribution (“cost basis” amount) to the time you make your conversion. If you convert immediately, you should essentially pay zero dollars on your tax bill. Therefore, even if your income is too high, you can use a Backdoor Roth IRA method to still get a Roth IRA.
Low-Cost Index Funds
When choosing what funds within your employer’s 401(k) plan you would like to invest in, you should be sure to choose funds that have a low expense ratio. According to a recent NerdWallet study, 9 in 10 Americans severely underestimate the amount of money they pay in 401(k) fees – to the tune of $150,000. That’s money that could have been saved for retirement and investors can try to minimize these fees by picking low cost funds. There are several fund screener out there on the web and they generally list the expense ratio for the funds.