If you’re in a position to save for retirement, it’s not hard to see how having a retirement account can be an excellent idea.
For most people, retirement accounts are the best way to save for your golden years. They have tax advantages, they allow you to grow your money at a faster rate than you would in a regular savings account, and many employers offer matching contributions.
In this post, we’ll discuss the three biggest benefits of having a retirement account in place so that when you retire (or just want some extra cash), you’ll be ready!
Retirement accounts have tax advantages.
There are three types of retirement accounts: 401(k), IRA and Roth IRA. Each type has its own advantages and disadvantages, but the main benefit is that you get to put money into these accounts without paying any taxes on it. So if your company offers a 401(k), you can contribute up to $20,000 annually!
With a traditional or Roth IRA you can contribute up to $6,000 if you’re younger than age 50 and $7,000 if you’re age 50 or older.
Let’s say you make $50,000 per year and contribute $19,000 toward your 401(k). By contributing this amount each year, in 30 years when you retire at age 65 with an annual income of $30,000 or more in retirement savings then at a 7% average annual rate of return — 82% will be tax-free!
Many companies offer matching contributions.
This means that if you contribute, say, 5% of your salary to your 401(k), the company will also contribute 5% of your salary to the account. This is a great way to boost the value of your retirement savings while also helping out your employer.
If you’re contributing 10% of your income—and most people should be aiming for at least that—your employer has a vested interest in encouraging you to keep up those contributions as well because they’ll match them.
You can save a lot more in retirement accounts than you can in a regular savings account.
Unlike a regular savings account, money in IRA accounts grows tax-free. This is because the money you’ve used to contribute to it, has already been taxed.
With 401(k), your contributions are not tax- deferred, but they are made with post-tax dollars. Interest earned on the account is tax free. However, you will pay taxes upon withdrawal.
Wherever you put your savings—whether it’s a bank or investment account—money that accrues interest is considered taxable income by the IRS. That means if you deposit $10,000 in an index fund and watch it grow to $11,000 after one year of compounding returns at 8% per year, you’ll be taxed on $1,000 when you withdraw it from the account (assuming a 30% marginal tax rate).
IMPORTANT NOTE: Most people should have at least one retirement account.
If you are not investing in a retirement account, you are missing out on some of the biggest benefits that come with saving for the future.
These accounts can be extremely beneficial and help to ensure that your money is working hard for you.
They do this by allowing people to save money without losing out on interest or earning potential while also keeping their savings safe from inflation (the amount of goods and services in an economy).
Retirement accounts are how you’ll get ahead and secure your future.
When you’re young, it can seem like there’s no point in saving for retirement. You have no idea what the future holds for you—maybe you’ll still be working when you’re 90! But the truth is, all too soon adulthood will set in, and then you’ll have bills and responsibilities that make saving for retirement a lot more important than ever before.
If you start investing now, by the time retirement rolls around, your savings will have grown substantially. And if you invest wisely (and invest consistently), they’ll grow even more! That means that when you retire, you can live off of those investments instead of having to work again or cut back on expenses. So if saving for retirement is something that concerns you—and it should be!—then start putting money away today!
If you’re in a position to save for retirement, it’s not hard to see how having a retirement account can be an excellent idea. It might take some effort to set one up and learn how to use it, but once you do, the benefits will be worth it.
