Retirement

An important aspect of your finances should be a retirement account. It is never too early to think about retirement. While the huge dip in the stock market has turned many retirement accounts into major losses, many of them will recover over time. It is always a risk to put money in the financial markets, but with risk comes gain. Retirement accounts are meant to be long term, non-liquid accounts.

Most people have probably heard or contribute to a 401k. A 401k is a retirement account associated with a company you work for. A 401k is a great tax advantage because you are not taxed on the money you contribute. Your employer takes your contribution out of your paycheck before they deduct taxes. Another benefit of a 401k is that your employer will match a certain percentage of the money you contribute to it. This is instant profit for you. Most employers will only match up to a certain percentage of your income. For instance, your employer may contribute 50% of your contribution up to 6% of your income. So, if you made $40,000 a year, your employer would contribute up to $1,200 a year as long as you are contributing $2,400 a year. Take advantage of this maximum contribution by your employer. If they will match up to 6%, then contribute 6% of your earnings. The downside to a 401k is that you are not fully vested right away, and you could loose the money your employer contributed. Check with your employer. Some require a year, others won't fully vest you until you have worked for at least 5 years with the company.

When you leave your employer, you can cash out your 401k with a penalty, roll it over to another 401k plan with your new employer, or roll it into your IRA. Individual retirement accounts (IRAs) are personal retirement accounts that you control. A huge downside is that you have no one matching the funds you put in. An upside is that you have the ability to invest in individual stocks, bonds, and mutual funds. If you know how to invest well, this can contribute more money to your finances by the time you retire than a 401k.

The two different types of IRAs are the Traditional and Roth. A Traditional IRA is tax deductible. You can write off the money you contributed to your Traditional IRA at the end of the year on your taxes. There is a maximum you can contribute to your Traditional IRA though. Your account will grow tax free throughout the years until you withdrawal the money. Once you turn 59 1/2, you can begin withdrawing the money and will be taxed at your regular income tax rate. If you withdrawal the money before you turn 59 1/2, you will a 10% penalty on any earnings unless the funds are used for higher education.

Finances that you contribute to a Roth IRA is not tax deductible. Fortunately, you are not taxed when you withdrawal the funds. To qualify for this tax-exempt status, you must be at least 59 1/2 when you withdrawal the funds and have had the account for at least 5 years. While you must pay taxes on all your earnings with the Traditional IRA, you are not taxed on your earnings for your Roth IRA. The Roth is only available to singles making $95,000 or less and couples making $150,000 or less. You can convert your Traditional IRA to a Roth, but you will be taxed on any earnings in your Traditional IRA. You are taxed at your current income tax rate, so it is best to convert the Traditional when you are in a lower income tax bracket.