The Fine Print: January's Tip

January – the fine print (aka the boring details):  

Many employers offer a retirement savings account called a 401K (companies or for-profit organization) or a 403B (non-profits).   These are both the same thing.  This is a way for you to start saving for retirement and at times for your employer to help you by contributing a “match amount”.     

The money you contribute is invested and grows over time for your retirement.   If you cash it out before retirement, you will have to pay a penalty and taxes.  So, put it there and leave it.  Watch it grow over many years so one day you will have a nice pile of money.  

If you don’t have a retirement savings account (a 401K or 403B) at work, you can do this on your own by opening up a ROTH IRA.     A Roth IRA account is an account you can set up on your own at a bank, credit union or with an investment brokerage.        

The difference between a 401K/403B and a ROTH IRA is that one is funded with pre-tax dollars and one is funded with post tax dollars.   Pretax means that the money you contribute comes out of your check first (pretax) and then you pay payroll taxes on the rest of your check.   This saves you a little bit on the taxes now and in return when you retire and may be in a lower tax bracket, you pay tax when you take out the money.   Post tax means you use your take-home pay after the payroll taxes are paid now and when you retire and take money out, you do not pay taxes from funds from your ROTH IRA.

If you have the option of a retirement fund at work, do this first.   If you open a 401K/403B that your employer offers, it uses pre-tax dollars.  Plus, your employer might contribute some of their money to your account, called the match.    This means you add money and they add money to match your dollars up to a certain percentage.  It’s their way of helping you towards retirement.  These accounts replace pensions for most people.    Many companies don’t offer pension funds anymore, but even if yours does offer a pension, this is an added way you can help by contributing to a 401K/403B.

  • If your employer matches, you should be contributing up to the match.   Ask your H.R. representative if there is a company match and what it is.  If it is 2%, you should start contributing 2% so you can get the match.  Then you keep going adding a percentage when you can, like at the beginning of each year or when you get a cost of living increase or when you get an increase. 
  • If your employer offers a match and you do not contribute, you get ZERO of the match!     That is called “leaving money on the table”.    It’s like they are offering you some money and you are saying, “No thanks, I don’t want it”.     
  • If you leave your employer, you keep the money you put into the account and do a direct roll-over to another retirement account.     Again, you never take out the money until retirement or you will pay taxes and penalties.    Depending on your company’s policy of when you are “vested” you keep their matching dollars too.     You can ask your H.R. representative when you are vested.   For some it starts the day they are hired and for others it is a few years.    Even if you plan to switch jobs, start contributing, because you can roll it over to another retirement account when you leave. 

A Roth IRA is post-tax, meaning you use your take home pay.   The good news is when you retire, the money and all the interest is tax free.

  • Some companies offer a 401K/403B Roth option where the money is post-tax, this is also a good choice.
  • I checked a local Credit Union who offered a Roth IRA with $25.00 to open the account and no fees, plus you can set up automatic transfers every month.     A local bank is probably similar.  An investment brokerage may charge you a fee and you need to ask how much.   It is $40.00 per year at one local firm… probably not your best option starting out. 

In short… you should start saving now for retirement!   You may think… I’m way too young to be thinking about retirement, but if you start small you won’t miss it and you will be investing in yourself and your future.   You are worth it.   Even if you save just $50.00 per month here is how it will grow, assuming 10% average growth: 

1 year $           628
5 years $       3,872
10 years $     10,242
25 years $     66,342
40 years $   316,204

Until next month!