Okay, you understand why you should be planning for retirement and you’ve figured out a way to set a little money aside each month. But now you’re confused. Where should you put your money so it grows as much as possible before you retire? And what about the time between now and retirement? What if you need some of that money? Can you access it? Fortunately, there are some very good ways for you to save for retirement and set up a nice safety net for yourself in the meantime.

401(k)

The experts, who agree on so little, agree unanimously on one thing: the smartest savings move you can make is to take full advantage of your 401(k) plan as soon as you can. The 401(k) has a number of advantages over other savings plans:

• The money is withheld from your paycheck, like taxes, so you never really see it. This makes it painless to save.
• Your investment is withheld before taxes, so your tax bill is lower.
• The interest you earn on your money is also tax deferred until you withdraw the money. That means that the interest compounds much more quickly, so your account grows faster.
• Some companies match 401(k) contributions. Your employer might match 50% of your contributions, for example, up to a given percentage. If they match up to 6%, you’re getting a 3% bonus. It’s free money. It would be silly not to take it. Most companies that match 401(k) contributions have a vesting schedule. This means you have to work there for a set period of time, usually two to five years, before the money is yours to take, but it will have been earning interest for you all along.
• Many 401(k) plans will let you take a loan from your account. You pay interest on the loan, but you’re paying yourself, so the interest goes back into your account. This means you can use your 401(k) account as a safety net or can borrow from it for a down payment on a house or another necessary purchase.

The only "catch" to 401(k) plans is that you can’t withdraw money from your account (except as a loan) without penalty until you are 59.5 years old. The penalty for withdrawing money early is the taxes on the money withdrawn plus a 10% fine to the IRS. Since most accounts allow you to give yourself a loan, this really shouldn’t be necessary, anyway.

The law allows you to contribute 15% of your earnings or $10,000 per year to a 401(k), whichever is less. If you can contribute to a 401(k), you should. If you can swing it, contribute the maximum allowable amount to your 401(k).

If you work for the government, a non-profit organization, or a small company, a 401(k) plan may not be available to you, but other similar plans may be. Talk to your employer or tax advisor about these comparable plans.

IRAs and Roth IRAs

If you don’t have access to a 401(k) or a similar plan, open an IRA. You can put up to $2,000 per year (if you’re single) or $4,000 per year (as a married couple) in an IRA. There are two types of IRA, regular and Roth. Most experts recommend the Roth for young people.

The biggest difference between the two is that you pay your regular income taxes now on the money before you put it into a Roth IRA, but not when you withdraw your money. When you contribute to a regular IRA, the money you put into the account is tax deductible now, but you will pay taxes on it later, when you withdraw it. Use the table below to compare the two types of IRAs.

You can open an IRA with a credit union, a bank, or an investment firm. Ask at your credit union about
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opening an IRA: it’s a good place to get clear, unbiased information about the best options for your needs. If you’re not a credit union member, look here to find one near you. 

For more information check this out or use our Investment Planner!