Tuesday, September 1, 2009

A great way to save for the future

Happy September! I really do love the start of fall. Okay, okay, it isn't technically fall for 3 more weeks. I'm impatient, per usual.

Food: On Sunday I made a pot of veggie soup. It was a big ol' can of V8 and 2 bags of broccoli stir fry veggies. I guess I could fake some optimism about it. It was pretty good, tasting like V8 and broccoli with some other veggies. It was kind of filling, and I know it's healthy. I should add some beans or meat to it to add a little protein & iron, two things I desperately lack in my diet.

Money spent today: $750 for September daycare. I cancelled my Target online order since there weren't necessities in there. If they would have shipped it, oh say, 4 weeks ago, I wouldn't have had 4 weeks to mull it over before cancelling.

If you work, do you have a 401(k) or 403(b) plan available to you? If so, do you use it? A good number of companies match up to a specific % of your income if you choose to contribute.

Why I Love 401(k)'s:
1) Since it's an automatic paycheck deduction, you don't miss the money.
2) You can often get free (employer's) money out of it.
3) You force yourself to live on less now.
4) Compound interest is your friend.
5) Lower your taxable income now in a traditional 401(k). These contributions evade the almighty taxman today. The taxman will be at your door when you retire, but you can never truly avoid the taxman with any financial product. Contribution limits this year are $16,500.

Now if you have a Roth 401(k) option through your employer, this is a little different. A Roth 401(k) operates much like a Roth IRA only with higher limits.

What's unique about a Roth 401(k) and Roth IRA? You will pay taxes on the amount of contribution now, but you will never be taxed again if you follow the distribution rules. This means you can leave that money in for 50 years and not pay a dime in taxes when you withdraw it! That is extremely appealing.

We don't know what's going to happen to tax rates in the future. They could go up; they could go down. Personally, I predict tax rates will be going up in the future. Our country is in all sorts of mayhem, and it will likely need to raise taxes to pay for its infrastructure in the near and long-term. That's why I think Roths are the way to go right now. Tax rates are fairly low now, so you can pay your taxes now and reap the rewards later when you don't have to pay taxes at withdrawal.

I also think Roths could be phased off if too many people jump on the bandwagon. Congress could realize how much it is losing in future revenue if people shelter their money in Roths.

If you have both a traditional and Roth 401(k) available to you, what should you do? Well, my recommendation is to hedge your bets and put some money in both. Remember, your total contributions for 2009 cannot exceed $16,500. So you can't put $16,500 in each (not that many of us even have that kind of extra money laying around).

I personally put about 2/3 of my contribution into the traditional 401(k) in order to lower my current taxable income, and then I put 1/3 of my contribution in a Roth 401(k). While I pay taxes on that 1/3, I know that it will grow tax-free for as long as I have it. And that thought puts a smile on my face!

So what if you contribute the maximum of $16,500 to your 401(k)? The latest statistics suggest that only 7% of people contribute the maximum to their 401(k) accounts. So what do we do if we're in that other 93%?

Contribute up to the employer match, at the very least. This is free money! And contribute any additional that you can. Whenever you get a pay raise, increase your 401(k) contribution by a corresponding amount. You might object by saying that you need the money to live now. I will respond that you can tighten your financial belt more than you think you can, and your reward will be living the life you want in retirement with a nicely padded bank account. And who wouldn't want that?


Karin said...

Great tips Bethy!
So clear and easy to understand. And simple stuff we can all do.
Thanks! :)

Tere Terry Teresa Mer or Marie, you choose said...

You make my head hurt.

Miss J's Mom said...

Thanks, Karin!

Marie, that's in exchange for you making my head hurt with levy stuff. :)