There are several ways you can save for the future.
One way is Social Security, and you have no choice but to participate. Social Security is a government-run program that requires you to pay a certain amount of your earnings into a fund.
You don't write any checks for this; your employer is required to withdraw the money from your paycheck before it even gets to you. In fact, your employer makes a matching contribution to the fund, too.
Six-point-two percent of your paycheck goes to Social Security. So if your gross pay is $500 per week, $31 goes to the fund. And your employer will also contribute $31.
The government invests your money for you. On your 62nd birthday, you can start to withdraw from this account. The money you receive is taxed as income.
Similar to Social Security are two voluntary programs supported by the U.S. Internal Revenue Code: an IRA and a 401(k).
You can deposit up to $5,000 per year into an Individual Retirement Account (IRA). This contribution is generally deductible, which means it will offset your gross taxable income (reducing your income taxes). Your contributions can be invested as you see fit. Earnings aren't taxable until you start withdrawing from the IRA. You can begin to do that at age 59.5. Then the money comes to you as income, and taxes must be paid.
Deriving its name from a section in the Internal Revenue Code, 401(k) plans are established by your employer. If your employer offers a 401(k) plan, you can elect to have a portion of your paycheck deposited into a 401(k) account. Some employers will match your contribution – if so, that's a pretty good deal. You will not pay income tax on the money contributed. It can be invested, and as with an IRA, you pay no income tax until you start withdrawing from the 401(k) account (you can start at age 59.5).
Two similar programs are ROTH IRA's and ROTH 401(k)'s. Although the contributions to these accounts are not deductible, all the money you withdraw from a ROTH account (including earnings and appreciation) are tax-free.
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