Getting in shape is the go-to New Year’s resolution for most people, but the resolution that truly pays off is deciding to invest in your retirement. There’s the old adage that the best day to plant a tree was 20 years ago. If that is so, the second best day is today. The same goes for investing in your retirement. It’s not too late to contribute, and the sooner you start the better. Make 2016 the year you max out your retirement accounts and set yourself up for the future.
Use Your 401K
There are a couple immediate reasons to invest in your employer’s 401K plan. First, the percentage you choose to have deducted immediately lowers your total income tax hit because contributions are done on a pre-tax basis.
The second reason, which is the best perk, is that most employers match a certain percentage of what you provide. This is essentially free money and a guaranteed return on your investment. Here’s an example: If you contribute six percent of your paycheck to your retirement fund, your employer might kick an extra three percent for a 50 percent match.
You’re allowed to save up to $18,000 a year in a 401K, which isn’t an easy feat. It means you’ll need to save $1,500 a month to reach this level. It’s worth doing if you can afford it. The tax reduction and the general investment gains make it worth your while.
Max Out an IRA
Your 401K is handled through your employers, but an IRA has to be done on your own. Anyone making less than $116,000 is free to open either a Roth IRA or a Traditional IRA. These two types of accounts have their distinct advantages, but both serve the same essential purpose. Through these accounts, you’re allowed to contribute up to $5,500 a year.
If you open up a Roth IRA, you can withdraw the money tax-free once you hit the retirement age of 59 and a half. For a Traditional IRA, your contributions are tax-deductible but will be taxed once you make withdrawals at retirement age.
You’ll have to do some research on which brokerage firm to use. There’s Vanguard, Charles Schwab or E*Trade, to name just a few. Opening an account is an easy process. Once you’re set, you decide how to invest your money. You can keep things simple by choosing a mutual fund based on your planned retirement age, and then let the money grow on its own.
The IRA is a smart supplement to an employer’s 401K. Using both of these in tandem will go a long way in setting you up for retirement.
Invest in 2015
If you just opened an IRA, or you have one that you haven’t contributed to in 2015, you still have time to invest $5,500 for this year. The tax year comes to an end on April 15, so you have until then to contribute. You’ll then be able to contribute up to another $5,500 for 2016 afterwards.
Receive the Saver’s Credit
If you’re tucking away money for retirement, you should ensure that you’re receiving every benefit that’s available. The Saver’s Credit is a little known way to save even more money if you’re a low- to moderate-income earner.
Here’s how it works: The first $2,000 you contribute to retirement in an IRA or 401K provides you with an income tax credit that lessens your tax burden. The credit is worth up to $1,000 for single people and $2,000 for couples filing together.
Here’s who qualifies for the saver’s credit:
- Married couples filing jointly that earn up to $61,500
- The Head of household with income of $46,125 or less
- Married people filing separate or single people with income up to $30,750
According to a survey, only 12 percent of people who qualify bother applying for this credit.
Do What You Can
Maxing out your retirement options might not be possible, and that’s OK. Try to receive the maximum amount of matching from your employer’s 401K, and then max out your IRA to $5,500. Anything else is helpful, but those two routes will give you the most bang for your buck as you work your way through 2016.