Retirement plans are a great way to save for when you eventually stop working, because they have special tax advantages over normal brokerage accounts. This is a great benefit that retirement plans provide because they give you the option to save for retirement in a ‘tax-deferred’ manner. This means you get to skip paying taxes on the money you save right now and will then pay the taxes later when you take it out in retirement.
Alternatively, some workplace retirement plans allow you to save in a ‘Roth’ manner, meaning you pay taxes on the money you save now and then don’t have to pay taxes when you take it out in retirement. Doing your own research and talking with a financial advisor are usually the best ways to figure out which option is best for you.
Workplace plans, like your 401(k), are also often excellent ways to save for retirement because employers often offer a ‘match.’ This means that they will contribute a certain percentage of your income as long as you also contribute at least a certain amount. For example, your company might contribute 5% of your salary to your 401(k), but only if you also contribute 5% of your salary to your 401(k). Many people think of this as ‘free money’ because it is money they give you in addition to your salary, but in truth, it is money you have earned as part of your deal working for a company. Another major benefit of saving money in your workplace retirement plan is that they have higher contribution limits than IRAs, or individual retirement accounts. The more you can save for retirement, the better!
