the money man
Ten steps to financial freedom: #6 to #10
By TOM JACOBS
And now, the thrilling conclusion of 10 Steps to Financial Freedom!
In the last episode, steps 1-5 set the stage:
- Get out of debt – but smartly.
- Put something away for a rainy day.
- Have health insurance.
- Own a home, but not expecting to make money.
- Save for your children’s or your own education.
And steps 6-10 bring it home:
- Max out your work’s retirement plan. Meanwhile, if you have a job with an employer who has a retirement plan (401k, 403b, and the like), contribute the maximum amount you are allowed. At the bare minimum, contribute enough to receive the maximum match from your employer. Every dollar you put into the plan is pre-tax. It’s subtracted from your income; you don’t pay income tax on it. That means you “earn” your tax rate on each dollar contributed. If you are in the 28% tax bracket, that’s 28 cents on the dollar, which you just can’t find anywhere else. And the money your employer contributes is not taxable all. Free money!
- If you are not an employee with a plan or you are contractor or hourly worker, open your own “traditional” IRA and contribute to it every month, automatically. You gain the same benefits as with an employer plan but, of course, no employer match.
- If you qualify (if your income is below legal limits), open and contribute to a Roth IRA. The benefits of a Roth are that you never have to withdraw from it, unlike the requirement for a traditional IRA and an IRA into which you roll over your employer plan assets, where you must take a minimum amount out each year starting the year after you turn 70.5. (Seems far away? Just wait!)
- When you leave a job, roll over your employer plan investments to a “rollover IRA.” There are important rules on this to avoid taxes, but you then are not limited to your employer plan’s investment choices.
- Do NOT cash in your IRA before you are 59.5, because you will pay taxes and a 10% penalty on it. Think of it as money that is no longer yours. It is not a piggy bank.
You will find different lists anywhere you look. This is just one. The point is to pick and choose what works for you.
Tom Jacobs is the Marfa-based fee-only Investment Advisor and Portfolio Manager of Huckleberry Capital Management, serving clients of all ages and means in 20 states and three foreign countries from offices in Marfa, Eugene, OR, Silicon Valley, and San Francisco. You may contact him for an informal and free consultation at firstname.lastname@example.org and 432-386-0488.
Story filed under: West Texas Talk