Start Retirement to Save on Taxes?

Dave advises a caller when to start saving for retirement and how to do so effectively.

QUESTION:
Samantha is 32, just married and is self-employed.  Her business is doing well for the first time.  She and her husband have no retirement or savings.  Should she try to get her retirement savings started before April 15 to get the tax deduction?

ANSWER:


Read what Dave says:
You should not start your retirement savings until you have worked your way up the Baby Steps: get $1,000 in the bank, pay off all debts except the house, and then get 3-6 month’s of expenses in the bank.  Your entire income should be available to you if you want to invest and save effectively. 

You also need to remember that now that you’re married, all money is “ours,” not “yours” and “mine”.

After you’ve worked your way through the first three Baby Steps, you can invest $3,000 each in a good 401k that averages 12%.  That will grow to just under $6 million by age 70.  If you put that in a traditional IRA together to get the tax deduction, all of that money is taxable.  That means you get a little tax deduction now, but a big tax hit later. 

You should give up the little tax deduction now and do the Roth IRA, which grows completely tax-free.  You can save taxes on $3,000 this year or save the taxes on $6 million when you retire.  That’s the difference between a traditional IRA and a Roth IRA.  Always do a Roth IRA.

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