Should you contribute to your retirement accounts? How much? And why should you contribute to retirement accounts? The details of these answers vary from person to person. Some people
follow the belief that perhaps you shouldn’t max out to these accounts. I believe it’s worth exploring why you should contribute to your retirement accounts in the first place. I can also show you the plan I follow to max out my retirement accounts each year.
Before you go crazy with your contributions, I do recommend caution. Given that I am not a financial advisor of any sort, you should seek a professional out for your particular situation. You should also make sure you have an emergency fund to keep you afloat in the hard times.
Why contribute to retirement accounts?
The short answer is for tax benefits. All investments into your 401k, traditional IRA, and HSA are done pre-tax. This means by contributing to these accounts, you are lowering your total taxable income (by up to $26,900). Don’t worry, Uncle Sam is going to get what’s his. Unfortunately you can’t withdrawal from these funds before the government determined retirement age without large repercussions. You’ll also be responsible for the taxes on these withdrawals (before or after retirement). Don’t let that scare you away! More than likely, you’ll be in a lower tax bracket in retirement so you’ll have a much lower tax bill!
A second very important benefit most people have with their 401k is their employer match. This varies widely based on your employer, but it’s free money none-the-less. For example, my employer matches 5% on the first 10%. I view this as a 5% raise each year (paid to my retirement account) as long as I contribute 10% to my 401k. Sounds great right?! You’d be surprised how many people don’t contribute enough to get their free money!
Let’s check out a few examples:
Once I submit my taxes for 2017, I’ll show you my personal results. For now, lets assume we have three single individuals – one in each of the following tax brackets: 15%, 25%, and 28%. For simplicity, this example will assume each person is in their tax bracket in such a way that contributing the full amount to their accounts will not change their tax brackets.
Now I realize that the person in the 15% bracket would need to contribute roughly half their income to contribute the full amount. But the purpose of this example is to demonstrate that thousands can be saved in taxes.
Look at it another way:
In the above example, each person saved a hefty sum on their taxes. But consider this, those taxes saved are essentially an instant return-on-investment! Where else are you going to get an ROI of 28%?!
What do you think? Why do you (or don’t you) contribute to your retirement accounts? Let us know below!