Financial Behavior Modification Starter Guide by PA Williams

Author:PA Williams [Williams, PA]
Language: eng
Format: epub
ISBN: 9781483530055
Published: 2014-01-15T00:00:00+00:00

With a 401(k), you must start withdrawing contributions at 70 years of age. On the contrary, with a Roth IRA it is not necessary to withdraw funds when you reach age 70. I would recommend that you contribute to both, a 401(k) and a Roth IRA. With the 401(k), you should contribute to the amount of your company’s match, which is usually around three percent. You should invest the rest in a Roth IRA, because it will grow without being taxed.

Let's look at an illustration of what John’s 401(k) would look like at retirement age if he is 32 years of age and makes $50,000 a year. He will contribute $300 monthly in his company’s 401(k) plan. He will contribute the remaining $300 to a Roth IRA. John will work for the next 30 years with no pay raise (only for the mathematical simplicity of this illustration).

Chart -1 on 401(k) and Roth IRA at retirement age

Age 32-62

Time to Invest 30 years

Amount $50,000.00

Monthly pay $4,166.66

401(k) Rate $300.00

Company Match 0%

Return1 0%

Total Earned $592,178.48

Taxed at 27 % rate $159,888.18

Total after Taxes $432,290.29

Roth IRA

Age 32-62

Time Invested 30 years

Amount invested $3,600.00 yearly

Invested Monthly $300.00 Monthly

Return 10%

Total Earn $592,178.48

Taxes Owed 0

Total After taxes on $592,178.48

ROTH

ADVANTAGE

TOTAL $159,888.18

The main advantage of investing in a Roth IRA (versus a regular IRA) is that your investment is made with after-tax dollars, which means that your money grows tax free (See Chart 1 for an illustration.). A good strategy would be to invest in a 401(k). Regardless of your income, your contributions should be 15%. First, put in enough to get your company’s match (3-6%), because this is free money. Next, contribute to a Roth IRA, up to the maximum amount (for now it is $5,000). If you have invested the $5,000 in the Roth and you have not reached the 15% contribution, you can invest an additional amount in your 401(k), until you reach that magical 15% contribution level for retirement. As you know, there are no guarantees in life. However, by starting young and contributing 15% toward your retirement, you place yourself in a great position to retire with some serious money.

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