Investment Notes from Ken Ferrone, Vice President, First Savings Financial Services
As we approach that infamous day – April 15 – also known as tax day, many investors always wonder and sometimes question, should I invest in an IRA? What type do I choose? What about my 401(k)? These questions of course come up more prevalently around this time of year as investors prepare their taxes and look for all possible deductions.
Although this is far too short to give specifics about all the options, we wanted to take the time to give some brief descriptions on the ‘main’ retirement savings vehicles.
Let’s start with your employer’s 401(k). First and foremost the answer should be YES! Most employers offer a 401(k) as a means for their employees to help them prepare for retirement. Your contributions to a 401(k) come out before Federal taxes (essentially lowering your Adjusted Gross Income – and thus taxes). Depending on the state you live in, your contributions may come out pre or post state tax (for example, Pennsylvania taxes your contributions whereas in NJ your contributions are treated similar to how the Federal Government treats them). Not only do you receive a deduction off your income for your contributions (I repeat tax savings!) – but also, in many cases employers offer a match to the employee. For example your employer may contribute $0.25 for every dollar you contribute up to $6.00 thus giving you an instant 25% return on your first $6.00 of investments! Let me make this very clear, there is nothing I, nor any other financial professional can tell you that is going to give you an instant return like your employers match, so take advantage of this before anything else (before investing in any other vehicle make sure you have your 401(k) contributions to a point where you receive your companies full match). Make sure you not only review your investment options frequently, but also your contribution levels.
For those that do not have a 401(k) available to them, a good alternative may be to invest in an IRA. IRA’s can even be good choices for those who have maxed out their employer match in the 401(k), as almost always, you will have many more investment choices in an IRA than you do within your companies 401(k) plan. Many times, you can contribute to an IRA up until April 15th and still receive a deduction on your previous year’s tax return. Although you will not get that instant match, you may still benefit from the tax reductions. Don’t forget to put in IRA contributions for a stay at home spouse as well!
A Roth IRA does not give you a deduction on your current or future tax return. Like your ‘normal’ IRA, a Roth IRA’s earnings will grow tax deferred however. The big benefit to the Roth IRA is if and when you deduct money from this (unlike normal IRA’s where you have to start taking distributions, which then get taxed), a Roth IRA’s distributions are presently tax free (as long as you meet certain requirements such as holding it at least five years). Also, unlike the normal IRA / 401(k), one does not have to start taking distributions on a Roth IRA, and it can continue to grow tax-deferred.
Which one is right for you and should you consider a Roth conversion? These are all great questions that you should not only consider, but talk further about with you tax professional and financial consultant.
Securities and products offered through First Savings Securities, Inc. Member FINRA/SIPC
NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE – NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations. To determine which investment(s) are right for you, consult your financial advisor before investing.
