Strategy #4: Retirement Accounts
When it comes to investing, your rate of return makes a big difference. If you can save money on your taxes, then that money should just get reinvested back into your retirement account to make it grow.
Most retirement accounts are tax-deferred. This means if you keep your money in your retirement plan you don’t have to pay taxes until you make a withdrawal.
If you have a regular brokerage account and you make money, you owe taxes on that money, regardless of what you do with it. This even includes if you reinvest it.
If you know you want to save for retirement, you’ll get much more out of a retirement account versus regular brokerage accounts, so it’s worth your while to set one up.
Downsides of Retirement Accounts
There can be some disadvantages to retirement accounts.
Some of these concerns include:
- Early withdrawal penalties. If you’re younger than 59 ½, the IRS will charge you a 10 percent penalty on the funds you take out. This is in addition to the regular income taxes on that money.
- Withdrawal restrictions. If you’re using a work retirement plan, it’s also possible that your money will be restricted. This means your withdrawal options are limited.
- For example, if you put your money in a 401k plan, you might not be able to take it out until you leave the company.
- Limited contributions. Another downside with retirement plans is many of them restrict your contributions.
- For example, say you’re using an IRA. You may be restricted to putting in only $5,500 a year, and you can’t opt to add more even if you want to.
- Some retirement plans limit whether or not you can use them based on your income.
Retirement accounts are great for tax purposes, but it’s important to be aware of the restrictions and penalties associated with them.
Maximizing Retirement Accounts
Retirement accounts are supposed to be used for your retirement savings. When you’re putting money into retirement, keep in mind that it’s to be used when you’re in your 60s or later.
Try not to just bundle up all your money into one account and then think you’ll sort it out later. There’s nothing wrong with having both a regular brokerage account and a retirement account.
Perhaps you have two financial goals. One goal is to save for retirement, and the other goal is to buy a new house in 5 or 10 years. You should use your regular brokerage account for the house, and use your retirement account for your future retirement.
“To enjoy a long, comfortable retirement, save more today.”~Suze Orman
Thanks for reading! Stay tuned for more.