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Preparing for the Golden Years
Financial Planning for Retirement
By Megan L. Fowler
While saving as much as you can for retirement is a good idea, it's always best to maintain a regular savings account for large purchases.
"When a parent is employed with a company that matches the 401(k) contribution, this should be the first place the parent saves for retirement," says Tracy B. Stewart, a CPA and financial planner in College Station, Texas. "The employer contributions are 'free money.' It is important for the employee to contribute the amount or percentage that will trigger the maximum matching from the employer. Lower contributions by the employee will reduce the amount of 'free money' from the employer matching."
Additionally, the employee contributions will reduce their taxable income during the year of the contributions because the contributions are before-tax money, Stewart says. "The employee should contribute to an IRA (preferably a Roth IRA) after he/she has maximized his/her 401(k) contribution, not before. No one matches the IRA contributions. And those contributions do not reduce his/her earnings number on the W-2 like the 401(k) contributions do."
However, the drawbacks of 401(k) contributions can come about in the company's policy. "If the company requires the employees to invest their 401(k) accounts in company stock, the employee is putting all his eggs in one basket – both his employmet and his retirement hangs on the financial situation of the one company," Stewart says.
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