Most people mean nine states are not putting enough money away for retirement. I think a lot of people are relying on Social Security, but most of them don’t understand that as people live longer their Social Security benefits are going to be less and less. The government isn’t going to vitiate social security away from everyone, but they will reduce the benefits in order to keep it solvent.
Because of this it’s increasingly becoming important to make sure you have some type of retirement plan. And one of the reasons that a lot of people don’t put money into their retirement accounts is because they may need it for unexpected expenses in the future. Obviously a diversified strategy will give you the best financial outcome. You need to put some money and your time accounts but you also need to keep money in accounts that you can access easily and quickly.
By understanding the different types of retirement accounts and their tax implications you can position yourself for fast access to cash when necessary while minimizing your tax burden and doing your best to prepare for retirement.
Roth IRAs have some in damages but many people overlook. A Roth IRA allows you to put money in after tax and keeps the amount he grows as non-taxable income when you take it out in retirement. This has an interesting side effect. The money you put in originally into a Roth IRA is still available to you tax-free because you already paid taxes on it. Unlike a traditional IRA you can take out the money originally put in without triggering any type of penalty or fee. This can give you quite a bit of flexibility if you may need access to cash in the future but want to maximize your retirement investment. Not only do they give you the ability to get at a certain amount of money from your retirement funds without triggering any type of tax, it also put you in the best position for growth. If you’re investing early on the amount your retirement account grows is probably going to be significantly more than the amount you originally put in. This protects the larger amount from future taxes at the expense of paying taxes on the smaller amount now. For most people in the first half of their career this is a very good strategy.
There is one situation where you will not be able to get at your original mill investment in a Roth IRA without triggering any type of taxes or fees. When you roll money over from a traditional IRA to a Roth IRA there is a waiting period–you can’t take out the original amount for five years without generating some type of fee. Even though you pay taxes on the amount when you roll it over this is a special case where the rollover amount is not treated the same as it would be if it were money you put in directly to the Roth IRA.
This means that you expect to need access to your IRA funds at some point in the future you need to do the conversion from a traditional IRA to a Roth IRA five years in advance of the time that you will need the money. Honestly this type of planning is difficult to do so if there is ever any chance of you needing the money you may want to consider doing a traditional to Roth conversion as soon as possible in order to give yourself the flexibility five years from now.