Most people dream of a comfortable retirement. But not every one’s idea of retirement is sitting in a recliner watching “The Price is Right” every morning before your mid-day nap. (Just kidding!)

You may not even actually stop working, if you are passionate about what you do.  But it is likely that you want to reach that “financial cross-over point” where you can either:

1.) Live off investment or retirement income and stop working completely

2.) No longer need to work as hard, or as many hours, or keep doing something you don’t really like just for the money-i.e., become free to pursue other interests, whether they make you enough money to live off or not.

If you never plan to fully retire, the size of your nest egg, and therefore how much you need to save up during the years leading up to your retirement, may need to be less than if you plan to live off of your investments completely.

What this really means though, is that you may be able to reach your definition of retirement, or take care of your retirement needs, faster than you originally thought-i.e., early retirement-according to your own definition.

Currently, I really enjoy what I do for a living at my day job. I also enjoy some of my other hobbies and interests that occasionally earn me a little money as well. I have come to the realization that I could see myself doing what I do for a living in some fashion- either starting my own business or company, freelancing, or maybe even just working part time- for quite a while, likely into my 70’s or beyond.
It’s not that I want to stop doing what I am doing now for a living, but I certainly wouldn’t mind a little more freedom. Freedom to work when I want, and how much I want.  As of right now, that is what retirement, or early retirement would probably be for me. I would like to travel some, spend time with family and friends, spend some time helping others, and work some.

A couple of years ago, I probably would have said I would want to stop working completely when I retire. Not because I hated my job, but because I thought that was what retirement meant. Nowadays, I don’t feel that way. But who knows? Five or ten years from now, a traditional retirement may appeal to me, and I will have to change course somewhat- either work a little longer, or try to save more to be able to live off my retirement savings.

In preparing for battle I have always found that plans are useless, but planning is indispensable. -Dwight D. Eisenhower.

I think this applies to reaching your ideal retirement goal as well. It is the planning part that is important, not the actual plans. Your plans may change, but if you don’t engage in “planning” for them, whatever they end up being, it will be that much harder to reach them. In fact, you may not even realize it when you get there.

Have you thought about your retirement needs, and what retirement will mean for you lately? Is it different than a few years ago?

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It’s not something you want to hear, but it has been happening all too often lately. Many companies are stopping (or suspending, as some may like to sugar coat it) the employer match of their employees’ 401k contributions.

I have been lucky, but I have several friends and relatives who have had this happen to them. The big question, aside from wondering when and if your employer will start the match back up, is what to do- and how to keep saving for retirement when what was likely your primary vehicle for doing so has now lost some of its luster in the form of a matching contribution.

The free money in the form of the match made the decision to invest in a 401k easy. Now, you might begin to wonder what your options are and what is the best thing to do.

Some of your options include the following:

Do nothing and keep contributing to your 401k – Continuing to make contributions into your 401k plan is probably a good idea. You may not be getting a match anymore, but by continuing to save through your retirement plan at work through automatic, tax-free (OK, really tax-deferred) contributions from your paycheck on a regular basis.

Consider diversifying your tax treatment and contribute to a Roth IRA- Another thing to consider is taking some or all of the money you currently contribute to your 401k and either opening a Roth IRA or increasing your contributions if you are able and not at the yearly maximum, which is $5000 for 2009. Especially if you don’t have a Roth IRA yet, you are diversifying the tax treatment of your future retirement income. Your 401k investments will be taxed in the future, when you take withdrawals, while with a Roth IRA, you will pay taxes now, but your withdrawals, including interest, will be tax-free.

Pay off debt- I’ve touched on this before and discussed whether I should stop 401k contributions to pay off debt. A main argument many made against it was that you are leaving money on the table if you bypass your employer’s 401k match. But what if there isn’t one anymore? I think it is something to consider, but each person needs to assess their situation personally. If you have credit card debt at 20% interest, it sounds like a pretty good idea, because that is a guaranteed 20% return. (Especially considering the stock market’s abysmal performance over the last year or so) A student loan at 3% doesn’t seem like a great idea. The important thing is to make sure you are funneling all of that money to the debt you are trying to pay off, and start your retirement contributions back up right away after you have it paid off.

The best thing to do is to probably stick with the status quo, and continue investing in your 401k.  Because it is automatic and you have been making regular contributions, it may be a good way to make sure you keep saving for retirement. We are creatures of habit, after all.

Investing in a Roth IRA, especially if you don’t have one, can be a good idea to obtain some tax-diversification, but set that up for automatic withdrawals from your bank account so you don’t have to remember to make regular contributions.

Paying off debt could be an option and result in guaranteed returns, but you need to be careful to make sure the money is going in the right place, and to start saving for retirement again as soon as possible.

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Did you know the economic stimulus plan included the addition of computer technology and equipment, including internet access,  as a “qualified higher education expense” for 2009 and 2010. Now this may only help you if:

• Either you are in college, or have a child in college
• You have a 529 plan for yourself or your child
• and you have enough money in the 529 plan to pay for all of the other qualified education expenses (tuition, books, etc.) as well as a new computer.

What this would allow you to do is pay for a new computer, internet access, software, and other peripherals with money that has grown tax free from a 529 plan. With the state of the economy as it is, I am not sure if it will help too many people, but I am sure some will be able to take advantage of it.

I am sure there are other ways you could put this to use, but it all depends on your personal situation. For example, perhaps you could pay for a computer, internet, and other items with a 529 and then take a tax deduction for educational expenses, either the $4000 tax credit, the Hope Scholarship or Lifetime Learning tax credits.

From the text of the stimulus bill:

SEC. 1005. COMPUTER TECHNOLOGY AND EQUIPMENT
ALLOWED AS A QUALIFIED HIGHER EDUCATION
EXPENSE FOR SECTION 529 ACCOUNTS IN
2009 AND 2010.

(a) IN GENERAL.—Section 529(e)(3)(A) is amended by striking ‘‘and’’ at the end of clause (i), by striking the period at the end of clause (ii), and by adding at the end the following:
‘‘(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.
Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.’’
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to expenses paid or incurred after
December 31, 2008.

Note-you can’t buy software that is considered a game!

And from the text of the tax code mentioned above-for definitions of what qualifies

(F) Definitions
For the purposes of this paragraph—
(i)Computer technology or equipment The term “computer technology or equipment” means computer software (as defined by section 197 (e)(3)(B)), computer or peripheral equipment (as defined by section 168 (i)(2)(B)), and fiber optic cable related to computer use.

(B) Computer software defined
For purposes of subparagraph (A), the term “computer software” means any program designed to cause a computer to perform a desired function. Such term shall not include any data base or similar item unless the data base or item is in the public domain and is incidental to the operation of otherwise qualifying computer software.

(B) Computer or peripheral equipment defined
For purposes of this paragraph—
(i) In general The term “computer or peripheral equipment” means—
(I) any computer, and
(II) any related peripheral equipment.
(ii) Computer -The term “computer” means a programmable electronically activated device which—
(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and
(II) consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities.
(iii) Related peripheral equipment The term “related peripheral equipment” means any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer.
(iv) Exceptions The term “computer or peripheral equipment” shall not include—
(I) any equipment which is an integral part of other property which is not a computer,
(II) typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and
(III) equipment of a kind used primarily for amusement or entertainment of the user.

I would take this to mean printers, scanners, and the like. It is important that if you are able to take advantage of this, you read all of the associated documentation, and consult with a 529 and/or tax expert to make sure you are following the rules.

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The title of this post is meant to be sarcastic, but I do think their are many people who have lost confidence in the idea that investing in a 401k or a Roth IRA is a fool-proof way to reach your retirement goals. While it may not be fool proof or guarantee you the retirement lifestyle of your dreams, I really think that a 401k and/or Roth IRA are essential tools for reaching your retirement goals, whatever they may be.

While a Roth IRA or a 401k by itself may not get you to your retirement goal in the time frame you want, I think that not having one (or both) would make it much, much harder to reach your magic number.

Here are the Roth IRA and 401k contribution limits for 2009:

2009 401k limits

The maximum contribution limit for a 401k is going up in 2009, to $16,500, up $1000 from the 2008 limit (which was the limit for 2007 as well) of $15,500. If you are 50 years old or older, you can contribute an additional $5,500 in 2009.

2009 Roth IRA limits

The maximum contribution limit for a Roth IRA is not changing in 2009, the max. contribution will remain $5,000. The Roth IRA is supposed to be increased in increments of $500 based on inflation, so it is likely it will go regularly, but apparently it did not go up enough to reach the $500 increment. If you are 50 years old or older, you can contribute an additional $1,000 in 2009, for a total of $6,000.

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It has been several months since the last time I looked at my 401k plan. In fact, I believe the last time I checked my 401k was when Single Guy over at Single Guy Money asked his readers how much they had lost in their investment accounts. That was back on July 17th. I think my 401k accounts were down about 12-15% then, I know they are down a lot more since then, although I could not tell you exactly what that number is.

Why haven’t I looked at my 401k account since then?

Well, after the bottom fell out in September and October, I really wasn’t that interested in how much money I LOST in my retirement accounts. I was not going to pull it out of stocks and into bonds or a money market account, as my asset allocation is heavy on stocks due to the length of time I have before retirement; that did not seem like a good thing to do. Since I did not want to participate in “panic selling”, I just have not had the urge to see what the damage really was. Is this foolish? I don’t think so, and in fact, if I had more money to invest, I would probably increase my 401k contributions.

Am I afraid to look? Not really. Most of my 401k is in funds that track the major indices, like the S&P 500, or even the total stock market-although they are not actually index funds. So I have a pretty good idea of what my losses probably are.

My plan is to take a look in January, although I may do it before then, when my company match from this year goes in, and re-balance my 401k by placing my new contributions and the company match in the fund or fund type that needs to be increased.

Have you been obsessing over your 401k balance? Have you been checking it regularly over these last few months? Or have you stopped worrying about it? Should I be checking it more closely? What do you think?

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One of the unfortunate byproducts of the current stock market meltdown, is the fact that many people are going to have to delay their retirement by a few years, if not more. When times are good, and the stock market is increasing at 8% to 12% per year, it is very difficult for people to pull money out of the stock market and put it in safer investments.

Even though I am in my mid-thirties, I have experienced two periods of time in my working life where I have had co-workers or acquaintances tell me they were going to have to defer retirement for a few years due to heavy losses sustained in their retirement accounts, both after the tech crash and subsequent effects of 9/11, and the current stock market crash.

An equally unfortunate part of the equation is that many people getting close to retirement age these days are now pulling ALL of their retirement investments out of the stock market, and may never be able to make up the difference.

So how do you avoid this scenario?

The answer is asset allocation.

Asset allocation is how you have your investments proportioned in each investment category. For example, you could invest in stocks, bonds, real estate, and commodities (gold, oil, etc.), leave your money in cash, or even invest in foreign currency. Most of the categories can be broken down further, such as large cap stocks, small cap stocks, etc. Also, you can invest in some categories, such as commodities or even real estate by either buying certain companies that are part of that industry (i.e., stocks), or exchange traded funds that invest in a particular commodity (such as gold or oil), or even a real estate investment trust (REIT) for real estate. For the sake of simplicity, and because it is frequently the only investment outside of a home, let’s just look at retirement accounts an focus on stocks vs. bonds vs. cash-keeping in mind that some stocks could be a gold ETF or a REIT for real estate. The goal of asset allocation is to reduce volatility and limit the potential downside of loses to one class of asset. By the same token, however, the upside (or potential for gains) can be reduced if one asset class sees large gains.

There are two components of asset allocation that you need to examine:
1.) Your asset allocation vs. age, or when you want to retire.
2.) How often you rebalance your portfolio, or changing your asset allocation.

Asset allocation vs. age

There is an old rule of thumb, that the amount of investments you keep in stocks (vs. bonds or cash) should be 100 minus your age. For example, if you were 40 years old, the amount of money you keep in stocks would be 100-40 = 60%. While this may have seemed conservative a year or two ago, there are many, many people who would have loved to have this type of allocation over the last year. I would surmise that this could be adjusted somewhat based on your own personal risk tolerance, as well. But even if you were 20 years old, it would still mean that you would have 20% of your retirement funds in bonds or cash, such as a money market fund. Benjamin Graham (Warren Buffett’s mentor) recommended at least 25% in each category, and suggested that a 50/50 split might be appropriate.

Rebalancing Your Portfolio- Re-allocation of Assets

At some interval, whether it is every 6 months or every year, you should rebalance your portfolio back to the asset allocation you determined was right for you. You should also take into account your age, or how soon you want to retire. The closer you get to retirement, the “less risky” your overall portfolio should be.

Why?
Because this is how you lock in stock market gains, and limit losses. Going back to Warren Buffet’s mentor, he recommends a simpler way-

A good case can be made for a consistent 50-50 (stocks vs. bonds) division here, with adjustments for changes in the market level. This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines.

I do not see this as market timing-it is not based on what the stock market or your investments are going to do, but what they have already done-there is a key difference there.

By properly allocating your retirement assets to your age or retirement, as well as your risk tolerance, and rebalancing on a regular basis, you can limit the volatility in your retirement accounts and approach retirement age without worrying about a massive drop in the stock market putting your retirement plans on hold.

Are your retirement accounts allocated across different investment types? Do you rebalance on a regular basis?

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Nobody likes to hear or deal with the kind of financial news and stock market woes (although Monday’s gains made people feel a little better, I’m sure) that are going on right now, but besides the presidential election, it is about all that is on the news and is the most popular topic of conversation these days. But ups and downs in the stock market, even wild swings similar to what we are seeing lately, do happen, and they often make us feel a little stressed out or uneasy about our financial future. Taking steps to identify and alleviate worries about our finances can go a long way to making this roller coaster ride a little more bearable.

Examine your goals- If you have a very long time horizon, which could be as short as 10 years, or longer, you really should not panic. You will not need the money for a long time, which should give the stock market a long time to RECOVER. Looking at a long-term goal over a short period of time is not the way to do it. Not to mention, if much of the damage has already been done, there is really nothing you can do about that.

Learn from this experience- Remember how this makes you feel. If you are having trouble sleeping because of a large drop in your 401k, but still have 30 years to retirement, you investment allocation may not match your risk tolerance. Going forward, you may want to put new investments in a lower risk category to match your asset allocation to your risk threshold.

Boost your cash savings- One thing the economic downturn brings to light is the fact that cash really is king. If you feel uncomfortable with the size of your emergency fund or what your cash reserves are, find ways to increase your available cash to make you feel a little more secure.

Make smart money moves- Now may be a good time to buy a CD, open a high interest savings account like ING Direct or HSBC, or pay down debt, if it makes you feel more comfortable than investing.

Remember the fundamentals of investing- I haven’t heard to many people saying “Buy Low and Sell High” lately. Although some people are certainly taking advantage of the reduction in price of the overall stock market, you might think more people would actually be excited at the buying opportunity that seems to here right now. If you have extra cash, you might want to consider it. (Although I am not recommending it for anyone in particular, as every one’s situation is different)

Focus on the present- Don’t worry too much about what is happening to money you are not planning on using for 30 years. Make sure you are taking care of things today, first. Focus on the present and make sure you have everything covered.

Plan for the future- Keep you savings and investments in perspective. By the same token, however, if you don’t feel you are saving enough for the type of retirement you want, take steps to correct the situation.

Are you feeling stressed out or uneasy due to the volatility in the stock market and problems with the financial sector? How are you dealing with all of the “bad news” we have been getting lately?

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If you work somewhere in corporate America (or most places really) one of the most popular topics of conversation besides the huge slides and wild swings in the stock market has been variations of the following questions:

Should I stop contributing to my 401k?

Should I lower my 401k contributions?

Should I move my money out of stocks and into bonds or a money market fund?

One of the most popular articles on my site right now is Should I Stop Contributing to my 401k to Pay off Debt?, and most people are reaching it by searching for “Should I stop contributing to my 401k”

There is an obvious reason for these question and ones like them. People are afraid. No one likes to lose money, even if it is only on paper. If you are only a few years from retirement (around 10 years or less), you do have some valid questions, but hopefully you portfolio is diversified based on the time frame of when you will need to draw from your retirement fund. If not, now might not be a great time to move things. But you could start putting all of your new contributions into safer investments, to balance things out.

What if you are 20, 30 or 40 years from retirement?

Now might be a great time to INCREASE your 401k contribution

It’s true.

One person I know told me they were going to do this, and I think they are brilliant. This is the question people with a long retirement horizon should be asking, not if they should stop or decrease contributions. With so many years before retirement, a little foresight could pay off big. And it sure beats the heck out of all the pessimism going around.

If you know anyone who lived during or right after the depression (but I am not implying this is the same), what do you think their answer would be if you asked them if they wished they had invested right after the stock market crash or even a few years later?

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
– Warren Buffett

What are your thoughts on this? Should those with long time horizons be looking at this as an opportunity of a lifetime?

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With all of the recent bailouts of investment firms, mortgage brokers (Bear Sterns, Fannie Mae, Freddie Mac), and other financial institutions, as well as the economic stimulus rebate checks and talks of a second one, at some point it will have to be paid back in some fashion. Whether or not inflation continues to remain high, at some point the government will likely stop printing more money to cover everything, and will look to get that money back from someone, probably John Q. Public. While it is not guaranteed that taxes will go up in the future, it really seems like the odds are in favor of higher taxes somewhere on the horizon.

If that assumption seems reasonable to you, lowering your taxable income in the future as well as diversifying the tax treatment of your future income streams, like retirement savings, seems like a good thing to do. Fortunately, there is already a vehicle in place that will allow tax-free withdrawals of income needed at retirement age, the Roth IRA. If you haven’t opened a Roth IRA yet (which I have not), now is a good time to start thinking about it and putting it on the “to do” list. I have it as #2 on my financial planning list, right after eliminating credit card debt. I am putting in the amount required to get my 401k match from my employer, but the Roth IRA will be opened before I increase contributions to my 401k.

I guess you could say I am guessing that my taxes will be higher in the future, but to me, all signs seem to point to that being a strong possibility.

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Several times over the last month or two, I have had co-workers tell me one of two things regarding their retirement accounts:

• That they were thinking of moving all of their investments into the cash or money market fund.

Or, even worse,
• That they were thinking of stopping contributions all together.

In my opinion, both of these moves are bad, for multiple reasons. If you think the bottom hasn’t occurred yet, you are still trying to time the market or predict the future if you think it is going lower. You should really be considering long term asset allocation if you are making asset class changes, not trying to predict the future. And if you stopped contributing all together, you are likely missing out on an employer match and tax benefits. I would also guess the same person would miss the boat on when it felt OK to start contributing again.

The increase in the Dow Jones and S & P 500 over the last two days should teach us something. And I really don’t know if or when the stock market will bottom out, or if it already has. It really doesn’t matter. It has risen about 3% or so in two days. If you moved all of your money into cash, when you do get back in, it will most likely take you longer than two days to make 3%.

In order to achieve the average stock market results, or historical returns, you have to be in the stock market the whole time over that time period in question. You cannot move your money in and out and expect to achieve an average result over any period of time. Most people are satisfied with the average stock market returns over a 20+ time period.
You have to be in to win.

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The Roth IRA gets talked about quite frequently these days, as a great tool for reaching your retirement goals and building wealth. While many people are well-versed and may be experts on the Roth, for those of us just beginning our saving and investing journey, I thought it would be a good idea to touch on the basics and a few details of the Roth IRA.

What is a Roth IRA and how does it work ?

A Roth IRA (individual retirement account) is a retirement savings account which allows a person to save money for retirement which can be withdrawn tax -free during retirement, after reaching a minimum age of 59 1/2. Investments are normally made in stocks, mutual funds, index funds, or bonds, although other vehicles can be used as well. Investments are made with after-tax contributions, and as stated above all of the principal and interest can be withdrawn tax-free upon reaching an age of 59 1/2.

Roth IRA vs. Traditional IRA

In a Roth IRA, contributions are made with after-tax money, while traditional IRA contributions are tax deductible. Contributions to a traditional IRA are made with pre-tax money, but the withdrawals during retirement are taxed (both principle and interest) at you ordinary income tax rate at that time. Therefore, a Roth IRA can benefit someone who anticipates being in a higher tax bracket at retirement age. However, because contributions are made after tax, a tax-deferred option such as the traditional IRA can allow someone with a lower income the opportunity to put money away with a lower decrease in their take home income. There are no rule on the age of required minimum distributions of a Roth IRA, which is currently 70 1/2 for a traditional IRA and a 401k. (This means in a traditional IRA or a 401k, you are required to start taking out money when you reach age 70 1/2.) There are certain situations when money earned (in the form of interest) can be withdrawn as well, while the traditional IRA is far more restrictive on withdrawals. As long as the Roth has been open five years, earnings can be withdrawn if the participant becomes disabled. Contributions can be withdrawn from a Roth IRA at any time, since they have already been taxed. In some cases, up to $10,000 in earnings can also be withdrawn to acquire a principal residence.

Roth IRA Income Eligibility Rules

Income Limits for 2008

Single - Up to $101,000 (modified adjusted gross income)

Married filing jointly- Up to $159,000 for full contribution, partial between $159k and $169k

Roth IRA Contribution Limits-2008

For 2008, the maximum contribution to a Roth IRA is $5000 for those age 49 and below, and $6000 for those 50 and above. This limit is slated to increase $500 per year starting in 2009 to account for the effects of inflation. The $5000(or $6000) limit applies to all IRA contributions, so that is the max. that can be contributed to either a traditional IRA or a Roth IRA.

Roth IRA Conversion

If you have saved money in a traditional IRA, and wish to now pay tax on that money and convert it to a Roth IRA, you are able to do so if you meet the income limitation. A conversion is good for someone who has an existing traditional IRA, and has the money available to pay taxes on it now in order to eliminate future tax liability. This is especially attractive if the person anticipates being in a higher tax bracket in the future. However, only taxpayers with a modified AGI of $100,000 or less are currently eligible to convert a traditional IRA to a Roth IRA. This limitation is slated to be removed starting in 2010, so already many people are planning to do a conversion then. The tax liability will be able to be spread over 2 years (2011 and 2012), as well, which is an added bonus for many.

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One of keys of achieving a comfortable retirement is starting your retirement saving as early as possible. As a new graduate, you may make more money in the next year than you have in your entire life thus far. When you think about it, it can be quite exhilarating. But…., before you make grand plans for your increased income, even if they are practical things you may want or need like a new car or saving for a down payment for a house, think about your future and retirement plans for a few minutes.

How long do you want to work?
Do you want to retire early?
How much will I need for retirement?
Do you plan on getting married and maybe having children?

Whatever the answers may be to the above questions may be, NOW is the best time to start saving for your retirement goal. The power on time and compound interest are on your side, so the longer you wait the more difficult it will be to achieve your retirement goals.

How do I Start Saving for Retirement Now?

Fortunately for you and the rest of us, there are two great options available that stand out above any normal saving or investing you could use to save for retirement, the 401k and the Roth IRA, and they each have advantages.

Investing in an employer sponsored 401k plan:

A 401k is a tax-deferred retirement plan in which you make tax free contributions now, and pay tax on your withdrawals during retirement. Most employers offer a 401k plan, and the majority, but not all, offer some kind of match. This match is free money. Some will offer a 100% match up to a certain percentage, while some will offer a 50% match for each dollar you put in, up to a certain percentage. The contributions you make to your 401k plan will come out of your paycheck tax-free, meaning you do not pay tax on this now. By not paying tax on your contributions, the actual decrease in your paycheck is less than the amount you are putting into your 401k. For example, if you are in the 15% tax bracket, to put $100 per paycheck into your 401k will only decrease your take home pay by $85.00. This should allow you to put a little more than you might otherwise be able to, and you should. At a minimum, you should enroll in your employer sponsored 401k and invest the amount required to get the full match from your employer. Most employers will let you participate from the beginning, although some make you wait a certain period of time. As soon as you are eligible, start contributing to your 401k at your new job.

Opening and investing in a Roth IRA-

A Roth IRA is a self-directed retirement fund you set up and contribute to yourself. A Roth IRA is funded with after tax contributions, but your withdrawals during retirement, both principle (your contributions) and interest, will be tax-free. If your employer does not offer a 401k or does not offer any kind of employer match, a Roth IRA is a great place to begin your retirement savings. You should also consider opening a Roth IRA for any amount you are able to contribute from your salary above the amount required to get the employer match for your 401k plan. Because you will likely be in a lower tax bracket now than later on in your career, investing in a Roth with after tax income will not have as big an effect now on your take home pay as it may in the future.

Why both?

Investing in both a 401k and a Roth IRA allows you to diversify the tax treatment of your future retirement income. Money from your 401k will be taxable when you withdraw it, while money withdrawn from a Roth IRA will be tax free. By focusing on your retirement and starting now, you can set the foundation for the retirement you want in the future.

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