"The truth about wealth will set you free," - Deborah Owns, founder and CEO of WealthyU.
By JULIA ANDERSON
If you are working and worried about catching up on your retirement savings before the job runs out, consider starting an Individual Retirement Account.
This is an especially good idea if your employer is not contributing matching money to your work-related 401(k) retirement savings account or contributes very little (For example: Less than 6 percent at 50 cents to the dollar). So what's the difference between a 401(k) and an IRA?
These are all retirement savings accounts that can generate significant savings over time through tax-deferred (in the case of a traditional IRA or a 401(k) or tax-free in the case of a Roth IRA. Earnings inside 401(k)s and IRAs accumulate and can be reinvested without tax liability while you're working.
With a traditional IRA you are required to start withdrawals at age 701/2. With a Roth IRA, there's no withdrawal requirement. Meanwhile, when your work life ends your 401(k) savings typically will rollover into an IRA that you will manage yourself. So why not get some early practice? There are compelling reasons why IRAs may be the better choice even if you have a work-related 401(k)
First, it's another way to protect earnings while growing your retirement nest egg. Secondly, an IRA, as national financial-planning columnist, Scott Burns, says, "gives you freedom." You get the freedom to investment your IRA money where you want in anything from individual stocks to bond and stock mutual funds. The choices are far greater than with a 401(k) program usually offered through an outside money management firm. And IRAs are typically less expensive.
A 401(k), as we know, may give you limited investment choices and cost more than it should in management fees charged by the outside 401(k) manager.
"Unless your employer offers a very low-cost plan combined with a substantial matching contribution, there is a good chance that you'll do better on your own," Burns says.
Let's say, you're over 50 and playing catch-up on retirement savings. First make a household budget that you can live with. Give up giving money to your kids and grand kids and give up expensive vacations.
Get serious about saving and investing for the long haul.
You've got a 401(k) at work. Keep putting some money into it, say enough to receive whatever matching amount your employer is providing. Put half your 401(k) money in stock mutual funds with good ratings and half in bonds...knowing that you're not taking anything out until at least age 66.
Then set up an Roth IRA. Why a Roth? Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible but later withdrawals are tax-free. (Not always and not without certain stipulations). For instance, the owner must be at least 59½ for tax free withdrawals on the growth portion above principal).
A Roth IRA offers fewer withdrawal restrictions and requirements. Transactions inside an account (including capital gains, dividends, and interest) do not incur a tax liability and there is no age requirement for withdrawals.
Contributions to a traditional IRA are tax-deductible but withdrawals are taxed as ordinary income. Traditional IRA require a minimum distribution at age 70 1/2.
A low-cost IRA will likely beat any expensive 401(k) plan if there's no employer contribution, says columnist Burns. How to set up a self-directed Roth IRA or a traditional IRA? Set up an account to an online brokerage firm, then electronically transfer some money into it and watch it perform. There are any number of online investment sites that can accommodate your IRA account. Among them are:
Vanguard.com, click here.
Fidelity.com, click here.
AllyBank.com, click here.
Schwab.com, click here.
eTtrade.com, click here.
Brokerage firms and banks also offer IRAs but fees are typically higher for buying and selling stocks, bonds and funds. By managing your own IRA you can get crystal-clear clarity in terms of transaction fees and fund management fees and performance. Those things are very difficult to ferret out with 401(k) funds despite new legislation that require fee and expense disclosure.
Burns uses this example: Three 25-year-olds start putting $100 a month in 401(k) accounts. One account charges a nominal management fee of less than 1 percent. The others charge 1 percent and 2 percent fees per year, respectively, for fund management. All have a pre-tax annual return of 8 percent.
When the three retire at age 67, "the nominal fee account will have accumulated $412,049; the 1 percent-expense employee will have $304,371 and the 2 percent-expense employee will accumulate only $227,016." This pretty much makes the case for checking into fees related to your 401(k) AND your IRA accounts. It's YOUR MONEY!!!
And please, if you have daughters who are working, encourage them to get interested in investing and saving using a self-directed IRA now, while they're young. The longer the money can grow tax-free, the better. The more fun it will be.
IRA facts at irs.gov, click here.
How to start a Roth IRA, at GetRichSlowly.com. click here.
What's the difference between a traditional IRA and a Roth IRA? click here.
"Make Your Kid Rich with a Roth IRA, (Forbes magazine), click here.
"How Much Income will your Nest Egg Pay?" , click here.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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