Individual retirement accounts, also known as IRAs, are a tax-efficient way to save for retirement. Let's look at two different options: Traditional IRAs and Roth IRAs.
Contributions to Traditional IRAs — the most common type of IRA investment — are tax-deductible, meaning you do not pay income tax on the money you put into the IRA or any earnings the IRA generates, until you take that money out of the account. Since most investors wind up in a lower tax bracket in retirement, withdrawals from a Traditional IRA are usually taxed at a lower rate than they would've been at the time contributions were made and earnings were accruing.
By contrast, contributions to Roth IRAs are made with post-tax dollars. However, as with Traditional IRAs, any earnings in Roth IRAs accrue tax-free. The real tax savings with Roth IRA comes at retirement, because all withdrawals from Roth IRAs are tax-free.
Important to know about IRAs: You should begin investing in IRAs as early as possible to build momentum and earn more money. “Younger investors can take more risks (own a larger percentage of equities) with their IRAs and 401(k)s because they [don't need to] use that money until they retire," says Gabriel Pincus, president of GA Pincus Funds.
5. 401(k) Plans
401(k) plans are employer-sponsored retirement investment plans that enable employees to set aside tax-deferred income for retirement. In some cases, employers will match your contribution dollar-for-dollar, up to a specific percentage (usually between 3% and 6%). Like IRAs, the earlier you start investing in a 401(k) plan, the more money you'll earn over the long term. Most 401(k) plans hold a majority of stocks and mutual funds (which boost returns), especially when plan participants are younger and can take more risk. If your employer offers any kind of matching plan, you should park your retirement money in the 401(k) before investing in an IRA — the rate of return on those matching funds can't be beat!
Important to know about 401(k) plans: 401(k) plans provide long-term tax-deferred investing for retirement. The sooner you start investing in a 401(k) plan, the more likely it is that you'll see stronger investment returns. “If you want to lower your tax bill and accumulate wealth for retirement, participate in your employer-sponsored retirement plan," adds Johnson.
The Takeaway: Focus on Investment Fundamentals
Because everyone has unique financial goals, there isn't just one investment approach that works for everyone. To find the investment strategy that works for your personal situation, talk to a Synovus financial advisor. We can help you create a sound investment strategy and choose the types of investments that best fit your unique financial goals.
Ready to talk with someone to help you get started? Call us at 1-888-SYNOVUS (1-888-796-6887) to find a Synovus financial advisor near you.