I’ve heard this is something I should get or setup but don’t really know what is it.
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It is a way of contributing post tax money to an IRA (individual retirement account) so you don’t have to pay tax on it when you draw on it. So, you have to wonder, can I afford the tax *now* or can I afford the tax *later*, for many people it is easier to afford it now. However, if you make too much money you can’t contribute at all, you are stuck with a traditional IRA or buying bonds or whatever.
Having a sensible tax strategy for retirement is one of the best things you can do besides doing the saving in the first place.
When it comes to retirement savings you probably want to tax advantage and take free money. So step 1 is to determine whether your employer offers a 401(K) match. What I mean by free money is if you are like me, Mr. Employer will match up to 6% of my salary. So I get the most free money by contributing no less than 6%. Plus, that 6% reduces my overall taxable income, so it might be worth my while to put in even more up to $22,500 a year if you are under 50 and $30,000 if you are over 50.
Once you have that sorted out, you can talk IRAs, again, your employer probably offers a traditional IRA and they may even match into that. I had an employer kick in up to 3% in a 457 plan (an IRA but for government employees) *in addition* to the match on the 401(K). So that is your next option, again, it is pre-tax money so you get to reduce your taxable income. AND, you get 3% free…
Once you have exhausted those opportunities, check to see if your employer offers a deferred compensation plan or stock buy plan. Those aren’t expressly retirement accounts, but they are more flexible because you can use the money anytime and for any reason you see fit. A deferred compensation plan is like an IRA without penalty for early withdrawal. You still invest the money, it is still pre tax (so when you take it out in 5 years you have to pay tax on it), but *you* choose when you want to take it.
Once you have done all that, then I might consider a Roth (if you qualify) if you regularly come into amounts of money (bonuses, side jobs, no debt to pay, etc) that you don’t mind waiting for. Personally, and I am only speaking about my experience and my thoughts, I am not an investment advisor, once you tap out all of your potential employer options and you *still* have money left over…I chose to simply invest post tax money in a normal retail account. Saving for retirement is important, but so is saving for your kid’s college fund or whatever else you might want to do 20 years down the road but before you plan on retiring. I know people who paid for their children’s college primarily on the dividends of their investment accounts. These people are not Warren Buffet, they have professional salaries and they simply reinvested dividends and over the course of 18-20 years those can add up.
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