Long-term investing. In other words, retirement investing. Saving for your “golden years.” What does that really mean? Where should you put your money? Savings account? CD? Money Market? Retirement account? If so, what type? IRA, 401K, Roth IRA, TSP, TSP Roth? There is a multitude of information about these different accounts, especially if you begin to search online. In an effort to make this easier, here are four thoughts that may help you get started with retirement investing:
- Where should you put your money? Leave the savings accounts, certificates of deposit (CDs) and money market accounts for your short-term and mid-term savings. These accounts are best for your “wants” and unexpected expenses. Take advantage of the tax and other benefits of investment accounts to help you save for the long-term.
- Tax benefits and the different types of accounts. There are pre-tax and post-tax benefits to putting money in investment accounts:
- Post-tax investment accounts – you pay taxes and then deposit this money. If you are in a lower tax bracket now than you think you will be in the future, putting post-tax money in a Roth IRA can be beneficial to you. The benefit is that later, when you want to withdraw the funds, you will not be taxed on them because you have already paid taxes on the money.
- Pre-tax investment accounts – this money goes directly into an investment account before you pay taxes on it. If you are in a higher tax bracket now than you think you may be in the future, it may make more sense to put money into Individual Retirement Account (IRA). IRAs are usually used by those who are self-employed, business owners, or spouses. Learn more about spousal IRAs A 401K is an employee sponsored retirement account. Both IRAs and 401Ks are pre-tax investment accounts. For government employees and servicemembers, the employer-sponsored retirement plan is the Thrift Savings Plan (TSP). These accounts will lower your adjusted gross income (AGI) now, which means you will pay less in income taxes each year, however, you will be taxed on withdrawals of this money later.
- A tax penalty of 10% is assessed on any withdrawal from a pre-tax retirement account before age 59 1/2. There are circumstances where you can withdraw money from a Roth IRA without tax penalties, but there are specific rules governing such withdrawals and your account must exist for at least 5 years before you can access the money early.
- Protecting your investment. Saving for the long-term is important; however, if you are not handling month-to-month money management well, you may find a time that you will want/need to access your retirement funds. Have an emergency account. Make sure you have sufficient emergency funds to help with unexpected expenses. This account should be liquid – the money should be accessible on short notice and without penalties. Start with $500 and add to it until you’ve saved 3-6 months in living expenses.
These four thoughts only scratch the surface of the information and education available about long-term investing. For more information about saving for the future, follow our series – The DoD Blended Retirement System: Leading up to the Decision.