There's no time like the present to begin setting aside even small amounts of money you won't miss from each paycheck. Your future you will thank you, because automatic deductions require little effort while generating big rewards down the road.
Say you invest $500 a month for 30 years, from ages 30 to 60, and generate an average annual return of a realistic 6% over that time. That will build to about $474,300 to buttress what would then be your imminent plans for retirement.
And whether you're self-employed and contributing to an individual retirement account (IRA) or your employer sponsors your plan -- typically as a 401(k) -- you have the option of choosing one of the most powerful retirement accounts available: the Roth.
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Roth power: Pay now and not later
Any kind of IRA or 401(k) provides significant tax benefits. The big difference is that Roth accounts are funded with taxed dollars and the money grows tax-free -- and generally, so are your withdrawals after you reach age 59½.
Traditional IRAs and 401(k)s -- and their close cousins the 403(b)s and 457(b)s -- are funded through pre-tax contributions, so you have to pay the feds when you make withdrawals. They're taxed as regular income at that point.
There are some other significant differences. For instance, while there's a 10% tax penalty for withdrawals before age 59½ for both, there are no required minimum distributions (RMDs) for a Roth IRA. For a traditional IRA and most other retirement plans, RMDs generally begin at 73 under current law.
Either way, it's worth your time and especially your money to contribute to the max on these plans, which are the same for traditional and Roth accounts. For the 2023 tax year, that's up to $22,500 into a 401(k), 403(b) and most 457 plans if you're under 50, or $30,000 if you're 50 or older. For IRAs, it's $6,500, plus a $1,000 catch-up contribution at age 50 and up.
Your future income can be your guide
You don't have to choose just one, by the way, as you build your nest egg. You can contribute to both traditional and Roth IRAs and, when available, employee-sponsored plans. As for choosing between the two, your planning should include what you think your income might be in retirement.
If you think you might be in a higher tax bracket, the Roth gets the nod, since that money has already been taxed. Lower-income earners in retirement might prefer the traditional IRA and 401(k) since that money would be taxed as regular income.
How to mix and match these and how to invest within those accounts is up to you, but it's a good idea to turn to a trusted financial advisor to help you decide what to do now and to help you make adjustments in the future.
