Help boost your retirement savings by following a few simple guidelines.
You hear it over and over -- and that's because it's so important: Pay yourself first. You may be living paycheck to paycheck, but if you have the chance to participate in your employer's retirement plan, don't pass it up.
The benefits of building your retirement savings through one of these plans can far outweigh the bite you'll feel to your pocketbook. What's in it for you? A 401(k), 403(b) or Thrift Savings Plan not only lets you save for the future but can also help your taxable income.
"Think of these plans as retirement savings accounts with tax benefits," says Gregg Rivas, USAA executive director of product management. "With many plans, you contribute a set amount of money from each paycheck -- before taxes are taken out. What you put into it, along with any employer contributions and the money you earn while invested in the plan, aren't taxed until you make a withdrawal, usually at retirement."
A new choice on some plans lets employees convert an existing traditional 401(k) to a Roth 401(k), where the account grows tax-free. "In this scenario, you make contributions after taxes are deducted from your paycheck and don't pay taxes on that money again when you withdraw it," Rivas explains.
Managing your plan can be intimidating, but these simple guidelines can help you make the most of your plan:
1. Contribute as much as you can. The more you set aside today, the more spending money you should have in retirement. If nothing else, contribute enough to get the maximum matching contribution, if your employer offers one. For example, your company may add 50 cents or more to every dollar, up to a certain percentage of your total pay, that you contribute to the plan. That can help your nest egg grow.
2. Consider your investment portfolio. Most plans offer a variety of investment choices. The key is to create an investment mix that matches your goals and the risk of financial loss that you're comfortable taking.
Some plans offer target date funds, which include a balanced mix of investments tailored to your retirement timeline. As your retirement date draws closer, the fund's investments are managed more conservatively.
3. Borrow sparingly. Many retirement plans let you take loans against your savings and repay the amount over five years, with the interest you pay going back into your account. While that may sound appealing, there are several reasons to consider other alternatives first:
- The money you borrow won't be invested, so your account's growth is limited to the interest you pay on the loan.
- If you leave your job, you may have to immediately repay the loan or face taxes -- plus a 10% penalty if you're younger than 59½.
- Interest you pay on your loan comes from money that's double-taxed: You've paid taxes on it before contributing to your account, and it will be taxed again when you withdraw it during retirement.
Should you ever say 'no' to an employer plan?
If your employer doesn't match your contributions -- or you're certain you won't be staying around long enough to take those matching contributions with you -- you may want to consider building your own retirement plan with an IRA. Keep in mind, though, that the IRS lets you contribute more to a 401(k) plan ($17,500 in 2014) than to an IRA ($5,500). If you're older than 50, catch-up provisions allow an additional contribution of up to $5,500 to a 401(k) and $1,000 to an IRA.