The endless possibilities available right now make managing your retirement finances pretty blurry. IRAs, Roth IRAs, 401(k)s, SEP IRAs and Simple IRAs – it seems like they all offer precious benefits and yet, none of them fits your preferences at the same time. How can you possibly know what’s really right for you?
As you probably imagined, making the perfect decision is all about the type of income you own. Therefore, there isn’t a certain rule of success to storing your precious dollars. However, this rule of thumb will guide you towards the most advantageous options:
- If your employer offers a 401(k) matching program, withhold as much you need from your paycheck to max out that match.
- If you can afford to save more, put it in a Roth IRA.
- If you max out your Roth IRA, go back to your 401(k) and withhold more from your paycheck until you’ve maxed that out.
This is the choice most retirees prefer, mainly because it’s free money. Over 50% of employers match at least part of their employees’ 401(k) savings.
For example, if you make $100,000 per year and withhold 6% of it for your 401(k), your employer will also kick in an additional 3%, which makes your total savings of $9,000 a year. Yes, this is free money.
This is another popular option because it also allows you to get extra cash by doing nothing at all. A Roth IRA won’t take an upfront tax deduction, like traditional IRAs do, but you can withdraw from it tax-free after you retire.
Another plus that traditional IRAs don’t offer is flexibility. This means that you can withdraw money from your Roth IRA to buy your first home and even pay more medical emergencies when needed.