This is another installment in our Financial Independence Series- a series of articles complete with advice and strategies that most anyone can implement right now to help move closer to financial independence. Be sure to read the other entries in this series and start saving today!
Among the savings goals many set for themselves, one of the most challenging and far- reaching is retirement. After all, for most of us, retirement is a long time away and the thought of saving sufficient funds to retire and live comfortably seems like a goal that could be out of reach. But retirement savings is, in fact, within your grasp and it’s an important piece in the financial independence puzzle.
Types of Accounts
Retirement savings can be directly accomplished through a 401k, Traditional IRA, or Roth IRA. A 401k (or similar work sponsored plan) builds wealth through payroll deductions and company matches. An IRA builds wealth through individual contributions. 401k plans and Traditional IRA allow tax exempt contributions with the tax deferred and paid upon withdraw. A Roth IRA works the other way around- contributions are not tax deductible now, but they grow tax free and are not taxed when withdrawn.
A Solid Barrier
Retirement savings plans are a nice way to build a nest egg for one’s golden years, but they offer another distinct advantage: A barrier to withdraw. With an ordinary savings account and most other investments, the money is just a few clicks of a mouse or the swipe of a debit card away. Many individuals, as hard as they try, cannot resist this temptation and continue to tap into savings, often for frivolous reasons.
With a retirement account, a barrier is established that, while not insurmountable, is still solid and strong enough to discourage withdraw except for extraordinary circumstances. The reason is because a withdraw from a retirement fund almost always carries with it a 10 percent penalty plus the payment of taxes. I don’t know about you, but knowing that I will be hit with penalties and taxes is enough to convince me to keep my hands off of the money. If I absolutely had to have the money, for an emergency purpose, I could get my hands on it. But otherwise, to avoid penalties and tax, I am highly unlikely to touch the money. This better ensures that the wealth continues to grow. It’s not surprising that, for a high percentage of Americans, the largest account each of us owns is our retirement fund and the barrier to withdraw is the main reason.
So Much to Gain
Retirement investment accounts represent a great way to save money and achieve financial independence. The barrier described earlier is only one of the many advantages. Probably the greatest advantage of all is the matching 401k contribution present in most places of business. This is free money, given to employees, for participating in the plan. You don’t have to do anything to get this money- it is there for the taking and it adds significantly to the value of such an investment over time.
Some may rightfully wonder why anyone would want to deal with the liquidity risk that comes with the 401k territory. If penalties and taxes have to be paid, some might argue that a 401k is not a good idea for those on tight budgets who may need to access the money before retirement. But this is not a good reason not to enroll in a 401k for the simple fact that a 401k has a matching contribution. These matching funds can easily amount to 25, even 50 percent or more of the individual’s contributions. With all of that free money, there will be more than enough to cover any penalties. And while you will be responsible for taxes if you withdraw money early, keep in mind that the money was taken from your paycheck tax free in the first place. You would only be paying back the taxes you didn’t have to pay when the investment was initially made.
Open an Account Today
Retirement funds are a very important part of a financial independence strategy. Here at Money Saving Parent, we have 401k plans, a Roth IRA, and a Traditional IRA. By having multiple accounts, we will be able to reach financial independence more quickly and, in the case of the two IRA, we can make contributions as needed as part of our overall tax strategy.
If you have a company sponsored 401K plan where you work but have not yet signed up, do yourself a favor when you go to work tomorrow and sign up immediately! The company match is reason enough to sign up for a 401k plan. By failing to take advantage of these plans, you are turning down free money and a key benefit of your job position.
If you don’t presently work or your employer does not have a 401k plan, make it a point to set up an IRA account as soon as possible. IRA can be established at your local bank, online, and through many financial institutions. The contribution limits on an IRA ($5,500 per year or $6,500 if age 50 and over, in 2014, with increases expected each year) are lower than with a 401k ($17,500 per year or $23,000 if age 50 and over, in 2014, with increases expected each year), but a retirement fund of any type is still highly desirable and any investment counts.
Financial independence takes work and a retirement savings plan is key to reaching this goal. Start saving today, and watch as your personal wealth climbs higher and higher, month after month, year after year.
Other entries in this series:
Copyright 2014, Bryan Carey