Having an investment account to draw from in retirement can make a world of difference when it comes to making ends meet. While the income from Social Security is vital, many also contribute to either 401(k) or IRA accounts to supplement their retirement income.
A 401(k)-retirement plan is a benefit that is offered by employers, while an IRA is a retirement plan that is set up by individuals. Both are managed by professionals, and either option is a great way to invest for the future.
Here are some key facts about retirement accounts to consider from James Beam, Head of Investment Management, Brokerage, Planning, Retirement & Strategy, U.S. Wealth at TD Bank.
Employer Contribution Matching
Who doesn’t love getting "free" money? If you work for a company that offers a 401(k) with employer contribution matching, that’s exactly what you’ll get every time you contribute to your retirement account. The amount that each employer matches varies so it's good to review the plan at your company. Employer contribution matching dramatically increases the growth of your retirement account. For those with tighter budgets, employer contribution matching can help you reach your retirement goals when you aren’t able to contribute as much as you would like.
Grow Your Account with Compounding Interest
When you invest in either a 401(k) or IRA, the money you contribute doesn’t just sit there—it may earn interest. But that’s not the end of the story. Through an investment principle known as compounding interest, your account will earn interest on the contributions and interest from previous years.
If you make steady contributions and the interest you are earning is compounding, your account may grow into a sizable investment over time. How frequently your 401(k) or IRA compounds depends on the assets you have in your portfolio. It could be either monthly or annually.
Enjoy Special Tax Breaks
When you invest in either a traditional 401(k) or IRA, you get two important tax breaks. These breaks allow you to put all your retirement money to work earning interest and compounding so that your account will continue to grow each year.
First, the contributions you make to your retirement account are tax-deductible. This means the money you contribute doesn’t count towards your gross income for the year, which lowers your taxable income.
Second, the money you invest in your retirement account grows tax deferred. This means you don’t have to report the interest you earn each year on your taxes. With a traditional 401(k) or IRA, taxes are paid when you make withdrawals.
You Get High Quality Money Management for a Great Value
When you invest in a 401(k) or IRA, your money may be managed by professionals. The fees for this service are modest and vary depending on the organization that oversees your account. The fee range is typically 0.5% to 2% of the value of your account annually.
It’s Never Too Late to Get Started
Many people postpone setting up retirement accounts because they may not think they can contribute enough to make a difference. When money is tight, they may have their hands full making mortgage payments, funding their kids’ college educations, and other things. With inflation currently at a 40-year high, finding new ways to stretch a dollar is easier said than done.
The sooner you can start investing for your retirement, the better. Each additional year that you can invest is another year that your account can grow through the compounding of interest and previous contributions.
It’s also never too late to get started. Even if you are only able to make a modest contribution every month, you will still be working towards growing a retirement account that you can use to supplement your Social Security. Every contribution you can make is important, and you’ll be glad to have it when you reach retirement.
For More on Personal Finance Topics
If you have more questions about other personal finance topics that matter to you, visit the Learning Center on TD Bank’s website.
We hope you found this helpful. Our content is not intended to provide legal, tax, investment or financial advice or to indicate that a particular TD Bank product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.