How Should Someone Invest For Retirement?

By: State Bank & Trust (Member FDIC)

Saving for retirement. Those three words can sound scary, especially if you have a short-term goal of getting your finances back on track, as the three families that are participating in this financial fix-up are trying to do. However, you don’t want to forget your long-term goals. Saving for retirement is a great way to ensure you’re on your way to saving for the future.

One good thing is that you have a myriad of options for saving. One of the best ways to save for your retirement is through participation in an employer-sponsored qualified plan. The most recognized employer sponsored qualified plans are 401(k)s, 403(b) s, and simple individual retirement accounts, or IRAs. These plans allow employees who qualify to participate to save for retirement in a “tax advantaged” manner. Qualified plans like these allow employees to defer funds from their paycheck into a retirement account, up to an annual maximum dollar limit. The annual dollar limits are substantially higher than your standard IRA annual contribution limits. Your employer may also offer a matching contribution on a certain percentage of your deferral. For example, your employer may offer to match the first 4% you defer, dollar for dollar. That means, to take full advantage of the matching contribution, you must elect to defer at least 4% of your pay! Don’t leave free money on the table by not taking full advantage of any employer matching program. Many employers work with a financial institution to administer their sponsored qualified plans. It may be best to set up a meeting with a representative from the financial institution to determine how much you could invest.

If you work for a company that does not offer a qualified retirement plan, or you’re looking to supplement your retirement funds further, investment in an IRA is a great idea! IRAs in general are titled as either traditional or Roth. Traditional IRAs are considered tax deferred investments (taxes paid when funds are withdrawn). Taxes on a Roth IRA are paid up front, which enables the account to receive the advantage of tax-free growth.

To fund a traditional IRA, you must: 1. Have earned income of at least the amount of your contribution. (Interest income will not be sufficient.) 2. Be younger then 70 ½ years of age. However, the deductibility of the contribution will phase out depending on your tax filing status and your income. This is in contrast to a Roth IRA, in which contributions are never tax-deductible, but qualified withdrawals are tax free. Both types of IRAs have restrictions on withdrawals, especially those taken “early,” or when you are younger then 59 ½ years of age. Please follow the link to IRS Publication 590, which outlines IRA’s in depth.

To see how your investment would fare in each type of IRA account, use State Bank & Trust’s comparison calculator.

Not everyone is eligible to open certain IRAs, and there are maximum contribution levels. We suggest that you visit with a reputable financial or tax advisor to develop your financial plan for a secure future.

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