Retirement savings with a 401k and a Roth-IRA
You know there are several types of retirement savings accounts, including 401ks and Roth IRAs. You also know that everyone needs to put away money for later in life. However, it may be difficult to decide how to save and when to begin saving. This article helps you with a basic understanding of tax sheltered savings plans, a subject that the Vernon Hills CPA firm of William E. Huml & Co. can discuss with you further. We begin with how to optimize your retirement savings plan by covering the following topics:
• Begin saving early in your career
• Learn your retirement savings options
• Contribute to both a 401k and a Roth-IRA
Begin saving for retirement early in your career. It’s important to begin a long term savings program as early as possible due to the magic of “compounding”. For example, you begin saving $20 a week at age 25, about $1000 a year, in an account that earns 8% interest annually. If you stop contributing to this account when you’re 35, your $10,000 investment will grow to over $165,000 by the time you turn 65. If you begin this same savings program when you’re 35 and contribute until you’re 65 your $30,000 investment will grow to around $120,000.
Why does this work? Because of the fact that the 8% interest in the first year is compounded in the second, and the compounded interest in the first and second year is compounded in the third year, and so on until you reach 65. Mathematically, it looks like this:
Yr1: $1 invested x 8% interest = $1 x 1.08 = $1.08 at the end of year 1
Yr2: $1 invested x 8% interest plus $1.08 from yr 1 x 8% = ($1 x 1.08) + ($1×1.08)($1×1.08)
Yr3:$1 invested x 8% interest plus $1.08 from yr2 x 8% plus $1.08 from yr1 x 8% X 8%
= ($1 x 1.08) + ($1 x 1.08)($1 x 1.08) + ($1 x 1.08)($1 x 1.08)($1 x 1.08)
= $1.08 + $1.17 + 1.26
= $3.51 Ending Balance with $3 invested for 3 years
As you can see, even if you only have a few dollars a month to invest – you should do it because it will continue to grow for so many more years. It’s important to start saving early in order to get the full benefits of compounding
Learn your retirement savings options
If you would like to discuss further the best options for your tax advantaged retirement savings plan you should contact William E. Huml &
Co. Certified Public Accountants, serving Vernon Hills. This Vernon Hills CPA firm offers FREE consultations for individuals and business owners. They can be reached at (847) 918-9700, and would be happy to discuss what mix of retirement plan contributions will offer you the best tax-sheltering for your individual situation. William E. Huml & Co. Certified Public Accountants is committed to the standards and ideals of the accounting professional and to the financial well-being of its clients.