Tax Deferred Savings

Individual Retirement Accounts

• Start now. You may think that 15 to 25 years from now is plenty of time to begin a retirement savings program. Think again. Those years will likely be filled with financial obligations—such as child-rearing and housing expenses—plus you’ll lose the awesome power of decades of compound interest.
• Open a roth or traditional IRA (individual retirement account). Tax-deductible traditional IRA deposits and earnings are taxed upon withdrawal. Roth IRAs have no up-front deduction, but earnings are tax-free after age 59 1/2 for accounts open for at least five tax years.
• Every little bit helps. Break down your annual IRA contribution into a weekly savings amount (for example, $2,000 of savings = $40 a week with two weeks “off”) and get started today. If you save $2,000 a year and earn 9 percent, on average, you’ll have about $675,700 after 40 years. Save for only 30 years and you’ll amass $272,600 or 60 percent less.
• Be patient. A 9 percent average annual return will require investment in stocks or stock mutual funds along with plenty of patience to ride out inevitable market fluctuations.

Tax-Deferred Retirement Savings Plans

• 401Ks. Start contributing to a tax-deferred retirement savings plan: 401(k)s for employees of corporations; 403(b)s for employees of schools, colleges, and nonprofits; and 457 plans for state and local government workers.
• Know your employer match.Try to contribute at least the amount your employer will match (6 percent of your pay, for example). This is “free money” that should not be passed up. Getting a match on savings is like getting a 25, 50, or 100 percent return (depending on the match rate) on your investment.
• Give your 401K a raise, too. When you get a raise in pay, raise your contribution. For example, if you earn $40,000 and get a 2 percent raise, save at least 1 percent ($400). It may not seem like much but, after 30 years with an annual 8 percent average return and 3 percent average pay increases, you’ll have $66,600 more at age 65 than you’d have otherwise.
• Tax benefits of 401Ks. Tax-deferred retirement savings plans offer three benefits: a federal income tax write-off, ongoing tax deferral, and automatic deposits via payroll deduction.

Investment Options

• Know your options. Contact financial institutions, such as banks and mutual fund companies (for IRAs), and your employer benefits office for information about enrollment paperwork and available investment options.
• Research your broker. When contacting a broker to assist you with your investment, visit FINRA's BrokerCheck to learn more about the professional's background and business practices.
• Low maintenance plans. If you’re not sure where to invest, one low-maintenance option increasingly used is tax-deferred plans. These are typically referred to as Target Maturity Funds. These funds typically include a mix of stocks, bonds, and cash assets and automatically become more conservative as investors get older.
• Low expense options. Low-expense stock and bond index funds that track the performance of benchmark market indices such as the Standard & Poor’s 500 index of U.S. large company stocks, are another option. A third option is asset allocation funds that include different portfolios (for example, moderate growth) with varying proportions of stocks, bonds, and cash assets.
• Don’t buy too much company stock. If your employer 401(k) plan offers company stock as an option, don’t go overboard. Many financial experts advise limiting company stock to no more than 10 percent of the value of your account. Otherwise, you’re at greater risk of financial loss due to inadequate diversification. If your employer loses money, you could lose not only your job, but also your retirement savings.