NEW YORK (MainStreet) — Saving for retirement can be tough to stomach. We know it’s important, but it’s difficult to plan for something that’s years, and for some people, decades away.
A survey from the Employee Benefit Research Institution showed that 57% of consumers have less than $25,000 saved for retirement, while nearly half of the participants lacked confidence about being able to afford a comfortable lifestyle during retirement.
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Two widely used retirement accounts are the 401(k) and the Roth IRA. The 401(k) allows consumers to contribute pretax dollars, while money contributed to a Roth IRA has already been taxed.
The 2013 contribution limits for the 401(k) is $17,500 and $5,500 for the Roth IRA. Contributing to both accounts undoubtedly maximizes your retirement savings goals, but this nonetheless makes for a daunting task, especially if you’re living paycheck to paycheck.
Figuring out which account you should allocate more money to depends largely on how robust of a 401(k) program your employer offers.
“Many employers choose to match each dollar you contribute to your plan," says Ruth Ann Potts, manager at Country Financial. "If your employer provides this matching contribution, you want to at least contribute enough money to get the full employer matching contribution. For example if the match is 50% for every dollar you contribute up to a maximum of 6%, you would want to contribute at least 6%. For anything less than that you are giving up 'free' money.”
If you’re able to save money beyond the threshold needed to secure your employer’s match, Potts suggests directing that extra money toward the Roth IRA.
A perk of the Roth IRA is the ability to withdraw your original contributions (excluding the amount of money earned from the growth of the investments) at any time without penalties. With the 401(k), you’re subject to a 10% penalty if you withdraw before age 59.5.
If you find yourself in a situation in which you lose a job or need cash for an emergency, you can count on your Roth IRA for help. In this sense, it’s important not to ignore allocating money toward your Roth IRA. It’s always wise to keep a separate savings account for these emergencies, though, since the purpose of a retirement account is to park your money there for as long as possible to take advantage of compounding interest.
If you want to have the best of both worlds — that is, a hybrid account between the 401(k) and the Roth IRA, enter the Roth 401(k), which some employers now offer.
The money you contribute to the Roth 401(k) is, like the Roth IRA, after-tax dollars. But you also get the coveted employer-matching feature from the 401(k). Another benefit of the Roth 401(k) is that there are no income restrictions. In a standalone Roth IRA, you have to earn less than $112,000 (filing single) for 2013 to open an account.
As long as you’re making some level of contributions, you’re on the right track. Choosing between your 401(k) and the Roth IRA is a good problem to have, since it means you’ve taken the time and diligence to start to make a dent in your retirement savings.
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