How to Efficiently Invest for Retirement

SamanthaVin | Jan 27, 2011 |

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Whether your retirement is years away or a few years away, you should have it in the back of your mind. There is no reason to worry about it, but there are plenty of good reasons to start preparing for it. If you want to retire early, this is even more important. There are several ways you can invest for retirement.

Some individuals are fortunate enough to get a pension from their company. This means, when they retire, the pension plan will keep paying a salary to them. However, it won't be for as much as you were making before. It will be a percentage of it, the amount depending on how long you worked for the company and how it is set up. Even if you have a pension, adding extra savings by investing in a retirement account is still a great idea.

There are 3 main tax-advantage accounts. There are also different variations of them depending on if you work for a private or government organization, if you're self-employed, etc. The first one is the 401K. If you set up a 401K, you can contribute money toward it tax-free. The money will be invested in a mutual fund chosen by your company. Some employers will offer to match part or all of your contributions. For example, they might match 50% if you contribute up to 5% and 100% if you contribute more than 5%. This means, if you're contributing $1,000 a year, if they match 100%, they'll throw in another $1,000. You don't have to pay taxes when you contribute to it, but you do when you withdraw it during retirement.

The second type of retirement account is the IRA. There are two types of IRAs, a Roth IRA and a Traditional IRA. The traditional IRA works very similarly to a 401K. You can contribute up to a certain amount each year tax free and pay taxes when you withdraw it. Unlike a 401K, you have control of where your money is invested. This is great to add to your 401K if you want to invest more because there is a maximum amount you can contribute to either one.

What is a Roth IRA? A Roth IRA is similar to a Traditional IRA in that you don't get employer matches and you can choose the fund. There is a maximum you can contribute to any IRA, whether it's a Roth or Traditional. A Roth IRA withdrawal works differently in how it's taxed. When you contribute the money, you pay taxes. When you withdraw it during retirement, you don't pay taxes, not even on the earnings.

Combining retirement accounts is a great option. For example, you can start with your 401K if it has an employer match to get the most possible there. Continue investing more with an IRA and choose a fund that fits your needs, such as a more aggressive fund if you're young and far from retirement. The more you invest and save, the more you'll have for retirement.