Retirement can be tricky and choosing the right savings plan can save you a lot of money in the long run. Today we’re going to be talking about the different savings vehicles that are available to you through your employer.
Retirement Plans – Traditional
Most people have access to what’s called an employer sponsored retirement plan, and there’s two different ways to contribute to this employer plan. One is traditional, and then the other is Roth. Both of them have different benefits, and depending on your situation, one may make more sense for you.
The way the traditional bucket works is let’s say, for example, we have someone who’s making $100,000. If they contribute $10,000 to that traditional bucket, they get what’s called a tax deduction. So now when they go to file their taxes (since they have that $10,000 tax deduction) they’re only going to be taxed on $90,000 of their income. Now that $10,000 that’s in the traditional bucket grows without any taxes, but when you go to take that money out in retirement, that money’s going to be fully taxable to you. If you need $100,000 in retirement, and it’s all in that traditional bucket, you may have to pull out 120 to $125,000 because of the taxes that you’re going to have to pay.
Retirement Plans – Roth
Now, the Roth bucket works a little bit differently. When you put money into the Roth bucket, it goes in after taxes. So again, say we have someone making $100,000. They’re taxed on that income, and then it goes into the Roth bucket. The beautiful thing is that once it’s in there, as long as you use that account correctly, that money’s never taxed again. So when someone’s in retirement and they need $100,000, if it’s in a Roth, they can pull $100,000 out and pay $0 in taxes. That’s a really big benefit.
Find What Works For You
Figuring out what plan makes sense for you is really dependent on two things. One, where your income is now versus where it’s expected to be in the future. And two, where tax brackets are versus where tax brackets could be in the future – two things that are pretty big unknowns.
If we have a client who’s a young professional, maybe early on in their career, they may not be at their peak earning capacity. The Roth bucket may be a really good option for them versus someone who is maybe later in their earning years, probably at their peak earning capacity and in a high tax bracket; we would want to have them contribute to that traditional bucket to get the tax deduction now, versus they may be in a lower tax bracket in retirement.
Finance is personal for everyone, so if you have questions about whether you should be contributing to the Roth or traditional, please don’t hesitate to reach out to us at Wealthquest. We’re happy to give you some guidance.