One of the best ways to provide for your financial security is to invest in an employer-sponsored retirement plan such as a 401(k), 403(b), or 457 plan, if available. These tax-advantaged plans allow you to make pre-tax contributions. For example, let’s assume that you make $2,000 a month and contribute $200 to your employer-sponsored retirement plan. That pre-tax contribution would reduce your taxes from $500 to $450.1 Additionally, taxes aren't owed on any earnings until they're withdrawn at retirement, when you may be in a lower tax bracket.
What's more, Roth-style plans allow for after-tax contributions and tax-free withdrawals in retirement -- when your tax bracket may be lower -- provided certain eligibility requirements are met. Another big plus is direct contributions from each paycheck so you won't miss the money, as well as possible employer matches on a portion of your contributions.
If a 401(k) or similar plan isn't available to you, consider investing in an IRA. IRAs come in traditional and Roth varieties. Generally, contributions to and income earned on traditional IRAs are tax-deferred until retirement; Roth IRA contributions are made after taxes, but earnings thereon can be withdrawn tax free upon retirement. Note that certain eligibility requirements apply and nonqualified taxable withdrawals made before age 59½ are subject to a 10% penalty.
For more detailed information, see our retirement goal page.
1 Assumes a 25% tax bracket. This example is for illustrative purposes only.
GE 91145 (01/2016)