Get Most of the Money from Tax Savings and Employer Matching
Much, and maybe most, of the money you need to build wealth can come from other people — specifically the tax man and your employer, if you work someplace that offers a 401(k) or Simple-IRA plan. Quicken 2012 can help you track your savings.
It’s fine to say that you need to invest just $300 per month, and that produces the wealth you need. The big question is this: Where do you get that money?
You’ve got bills to pay and a rent or mortgage check to write. You want to enjoy at least a few of the material pleasures — like food and drink — that life offers up. Where in the world does someone come up with this kind of money?
Well, the answer is mostly from the tax man and your employer. No kidding. Because of the way that employer-matching provisions work in things like 401(k) and Simple-IRA plans and because of the way the progressive income tax system works, you can get a lot of money from your employer and from the government in the form of tax-deduction savings.
You may even be able to get most of the money you need for your retirement savings from these sources.
The following table shows how someone who wants to save $300 a month might come up with the money.
|What you want to save||$300||$300||$300|
|What you can get from employer||$0||$100||$150|
|What you can get from tax man||$90||$60||$45|
|What you come up with yourself||$210||$140||$105|
The second line of the table shows how much you might get from your employer in a 401(k) or Simple-IRA plan. Note that an IRA obviously doesn’t include employer matching. (This line shows up, therefore, as zero.)
But 401(k) plans commonly provide a 50 percent match on at least the first portion of your contribution. (This shows up as $100 in the table.) And basically by law, Simple-IRAs provide a 100 percent match on the first portion of your contribution (which shows up as $150 in the table).
The third line of the table shows how much you might get in the way of tax savings. For example, if you're contributing $300 per month to an IRA, you might actually enjoy $90 per month in federal and state income tax savings if the tax rate you pay on your last dollars of income equals 30 percent. (This rate would be the case for many readers.)
The fourth line of the table shows what you need to come up with yourself. The IRA is the worst case shown in the table. With an IRA and $300 per month of savings, you would need to come up with $210 yourself. The 401(k) plan looks better; with it, you need to come up with $140 yourself. The Simple-IRA is the best case in the table. With it, you need to come up with only $105.