When deciding how to invest for your retirement, it's easy to lose that new job excitement as you get bogged down in the details. However, before you start decorating your desk, or printing up new business cards, there are a few very important decision to be made. Outside of the deposit amount or investments to select, deciding on a tax liability by investing in Roth 401K can generate tens of thousands of dollars for your retirement. The type of deposits you make into your new account could be the difference between a comfortable retirement and living annuity check to annuity check in your golden years.
While it’s true that few choices are more important than determining what amount you will deposit, this is also one of the easiest decisions to start with as it can be changed later. In an emergency, these can be paused for a time or they can be increased as your circumstances improve through yearly raises or promotions. However, if your company's plan matches your contributions, this decision is made a very simple one. It is always a good idea to invest at least as much as your company will match. If they match half of your deposit up to 6%, you can confidently select 6% and consider this decision complete. This will provide the maximum immediate return on investment which will grow exponentially over the decades before retirement.
Of course, once you decide how much to deposit, you’ll want to know where to invest. Should you choose your own stocks, pick from companies whose goods you purchase or services you regularly employ or defer that decision to a financial professional? With a little independent research, you can review the one, three, or five year records to select from the available investments. A mutual fund investment will help alleviate the risks by diversifying your account in a way that minimizes your personal investment expenses. Mutual funds are a collection of various similar stocks in a portfolio, but since they are considered a single investment, you benefit from diversification. You also have the bonus of a financial professional making the hard decisions without needing to spend weeks researching and hand picking each small company or paying fees on each one you choose. This frees you up for deciding on taxes.
In determining the plan for your future, your most important decision could come down to choosing whether you will handle the tax liability of your investment now or in your retirement years. Whether to make deposits to a standard pretax account or by investing in Roth 401K after-tax account, could come down to your age and income bracket. Assuming more than 10 years to retirement, and that you are in less than the highest tax brackets, the decision could be easier than you think. While it may cost a little more from each check as you make deposits into a Roth account, over time these deposits will garner earnings that far exceed the taxes held for your plan’s Roth Deferral option. Roth funds are deposited after taxes are withheld from your paycheck, but unlike standard after-tax money, the earnings on Roth funds are never taxable (if you wait until age 59 ½ to use them). Standard tax on retirement funds is 20%, an additional 10% if you aren’t retirement age. This means you could be looking at an additional $200-$300 on every $1000 that you withdrawal during retirement. With a good growth stock mutual fund and two to four decades of investment, this could easily yield tens if not hundreds of thousands in non-taxable earnings to make your retirement that much more enjoyable.
The ability to retire in comfort and feel a sense of security is now at your fingertips. With a few early decisions and a couple tools in your retirement toolbox, you can retain the excitement of landing that new job while you wade into the new and exciting world of retirement planning.