Yesterday, we published a Daily explaining what exactly a 401(k) is. We must have really struck a chord! Our readers reached out to us, both through email and in our comments section. They wanted to know how best to invest their retirement savings and in what order…
Our favorite topic. (And, we just launched AskLearnVest for these sorts of questions, going forward!)
To that, we say: Don’t worry. When it comes to retirement savings, it’s difficult to understand where money should go first. Add in the necessity of short-term savings for emergencies, and—boom!—it becomes necessary to understand priority.
LearnVest suggests the following order for retirement savings:
1) If your employer provides a 401(k) matching plan, open one immediately and contribute the FULL amount that you can (this way, you can get the maximum from your employee matching benefits, which is literally free money). Take full advantage of this if it’s offered, but then don’t contribute a penny more than what you need to get that match.
2) If your company does not match your 401(k) contributions, then just focus on your Roth IRA.
3) Fund an IRA to the absolute MAX if you can: $5,000 in 2009.
4) If you still have money left over after this, focus on your personal short-term savings fund! Since this is for fun or emergencies, it never hurts to add to it!
5.) If you feel you have any left over after the above, focus on maxing out your 401(k)! That’s $16,500 in 2009.
6.) After this, send your dollars into an investing account. Time to learn about investing!
Don’t think you qualify for a Roth IRA? Great News!
In 2010, everyone will be able to have a Roth IRA! This means that you can fund a traditional IRA today and “rollover” those retirement investments into a Roth IRA at the beginning of 2010. Once you convert from one to the other, you will owe taxes on what you convert. This means that you’ll need to do your homework on rollover polices, but DON’T let this discourage you. Once you pay those taxes, you will never have to pay taxes on your Roth IRA again!
