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10.2 Saving and Planning for Your Retirement

There is one proven way to increase your net worth: Put your money into assets that increase
in value. Clothing, electronics, and cars all drop in value over time. So, the rule of thumb is to
invest less in assets that decline in value and more in assets that have the potential to increase
in value, such as real estate and financial investments (including retirement accounts).

Retirement Plan Basics: 401(k)s, 403(b)s, and IRAs

Now you have a sense of what you can achieve with
long-term investments, but how do you get started?
One of the best and easiest things you can do is take
advantage of your company’s matching 401(k) sav-
ings program, if it offers one. This is free money!
Many employers will match your contribution, up
to a certain percentage. For example, if you make
$50,000 and you set aside 3% of your income, or
$1,500, your employer will also contribute $1,500
to your 401(k). Another benefit of this program is
that your contribution is tax-deferred, meaning
that it is deducted from your income before taxes
are taken out. If you work for a nonprofit, you may
have access to a 403(b) savings program. Both
plans are defined-contribution plans funded with
before-tax dollars. You will not have to pay taxes on
this income until you withdraw it at age 55 or 59½,
depending on your circumstances. Use of before-tax
dollars allows you to contribute more now, which
improves your growth potential. In addition, you
may be in a lower tax bracket once you retire, and,
thus, pay less in taxes. You can learn more about this Monkeybusinessimages/iStock/Thinkstock
important opportunity here: http://guides.wsj.com Thinking about and saving for retire-
/personal-finance/retirement/what-is-a-401k. ment early in your career is vital to
your well-being later in life. There are
What if you do not have access to an employer- different types of accounts that can
sponsored investment program? No need to worry; work for you, depending on what type
there are still options available to you. Individual of job you have.
Retirement Accounts (IRAs) are an effective way
to save for retirement. There are two kinds of IRAs:
the traditional IRA and the Roth IRA.

Traditional IRA

With traditional IRAs, you make contributions that you can deduct from your taxable income.
This is similar to contributing to a 401(k) using pretax dollars, described earlier. The value
of a traditional IRA grows tax free until you may begin to withdraw money at retirement age.
With a traditional IRA, the Internal Revenue Service (IRS) taxes each withdrawal made dur-
ing retirement at your tax rate at the time of the withdrawal.

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