Financial Literacy #4: How to Build Your Nest Egg

During your income-earning years, maximize your retirement plan contributions to build your nest egg and retirement savings:

401(k)

A 401(k) plan is a retirement savings plan sponsored by your employer, which allows you to save and invest part of your paycheck before taxes are taken out. Many employers offer an employer match, usually ranging dollar for dollar anywhere from 2-5% of your salary deferral (depending on the plan). If you elect not to participate, you essentially leave money on the table.

IRA

IRAs (Individual Retirement Accounts) are a way to save for retirement. Traditional IRAs are funded with pre-tax contributions and grow tax-deferred until you reach age 70 1/2, when the IRS requires you to begin distributing the assets. When you retire and draw on the funds, the money is taxable as ordinary income.

Roth IRA

Roth accounts are funded with after-tax contributions and act like special savings accounts. Unlike 401(k) plans and traditional IRAs, there are no required distributions from Roth IRAs, and any distributions after age 59 1/2 or a minimum of 5 years are 100% tax-free.

Regularly contributing to your retirement accounts is a great way to grow your investments for retirement. The more you contribute, the more your assets can compound over time and you should strongly consider maxing out your contributions, especially if they are eligible for an employer match.

Learn more about IRA vs 401(k) and the difference between a Traditional IRA and a Roth IRA. A financial planner can help you navigate these different plans and identify the right strategy for your income-earning years. Next, we’ll look at non-retirement investing options.