After your first 90 days at your new job, you received an extensive email explaining the details of the Retirement Investment Program that is now available to you. Other times you’ll get a large packet of information in the mail from the investment company on behalf of your place of employment with information on the 401k or 403b accounts you can open. Regardless of how you receive that information, it is filled with a truck load of information that is hard to digest. Then to top it all off they only give you 30 days to read through all of it, understand it and make selections. If you fail to make that deadline, you have to wait until the next eligibility period arises and that can be anywhere between 90 and 365 days away.
That process can be exhausting and overwhelming…
I know. I’ve been there. But I was fortunate enough to walk into that situation knowing exactly what my plan was going to be. When I received that lengthy email, I noticed that my company had a matching program. At 21, I knew I was going to contribute the minimum percentage necessary so that I would be able to get my company to match 50% my contribution each pay period. Here was my thought process:
If I contributed 6% of my pay check every month to my account, my company would contribute 3% of my paycheck amount to my account. And that money is not coming out of my pocket, but my company’s pocket?
THAT, MY FRIENDS, IS WHAT I CALL FREE MONEY…NEEDLESS TO SAY, I TOOK IT!!
Should your company have a matching policy for the retirement account, take your company up on that policy. Matching policies are there for you to take advantage of and if you don’t, you’re leaving money on the table that could add up to being that trip to Italy at age 62.
I also knew I needed an account that was going to benefit me with taxes now versus down the line because I didn’t make a lot of money right out of college. I needed all the tax help I could get because my main goal was to have more money now to invest so by the time I get to retirement I have my retirement plus money in my own brokerage account as pocket change. So the kind of account I chose was a traditional 401k, which took money out of my pay check pre-tax, lowered my taxable income and gave me a good tax return that I was then able to invest.
I was relentlessly researching these topics in college, long before I knew I was going to have a job once I graduated. Retirement planning probably wasn’t a pressing issue for you when you were in college, but it is now and that’s why we are talking about this here. If you haven’t opened up your retirement account and you have the ability to do so, I say do it now!
The kind of retirement account you open should be dependent on your personal money habits.
If you’re like me and really like the idea of an upfront tax break because you have plans to invest or save your tax returns, I say go for a traditional 401k or 403b. Just know that when you do take that money out at your retirement, you will be taxed according to your income tax bracket at retirement.
If you think you’ll be making significantly more at retirement than you make now, putting your income in a higher tax bracket AND you dont intend to save or invest your tax returns, I’d consider the Roth 401k or 403b. Money that is put into these accounts are taken out of your monthly pay after taxes have been applied. You are paying taxes on that money now versus when you enter retirement.
Now who is to say you can’t have the best of both world though? You actually can have both. The only thing with that is that the sum of your contributions to both accounts cant go over the annual dollar limit. Those dollar limits vary each year and by how old you are at the end of a particular year.
The goal here was to help you navigate the financial gray cloud of company sponsored retirement investment plans. Hope some of this helps clear the air. As usual if you have any questions leave them below.
Until next post folks…