Hands Off the Retirement Fund

Our blog hasn’t talked about retirement yet, but expect several posts on it soon enough. For now, let me start with a short introduction, particularly useful for those of you who are interested in setting up a retirment account but do not know where to start (or even what all the codes mean) and those who might already have a retirement account but want to explore other options.  Despite the fact that most of us are more than 40 years away from retiring (but maybe some of us will retire early!), it is never too early or too late to start planning.

I would categorize retirement funds into two major categories: pre-tax and post-tax accounts.

Pre-tax accounts: As the name suggests, these are IRA or 401K accounts (401K are so-called for the section of the Internal Revenue Code that governs such plans) that use pre-tax dollars.
Pro: You get to sock away money for your retirement before Uncle Sam gets his cut and your account grows tax-deferred.
Con: Uncle Sam gets his cut eventually, such as when you start withdrawing money for retirement.

Post-tax accounts: Also known as Roth, these are IRAs or 401K accounts that use post-tax dollars.
Pro: Your earnings grow tax-free, and because you have already paid taxes on the money you put in, you can also withdraw the money before your retirement age without penalty (just the amount you contributed though, not the money the account has earned).
Con: You don’t get the tax break in the beginning.

Within these two broad rubrics, your choices of investment run the gamut from CDs to mutual funds to stocks, which we will discuss at a later time.

The most important tip to keep in mind, though, is NEVER dip your hands into your retirement fund until you actually retire. Obviously, there are exceptions, such as medical emergencies and home foreclosure, but these should be few and far in between. Try to internalize this way of thinking about your retirement account. And should you find yourself in the unfortunate situation of needing to access that money, WSJ’s has a good recent article going through the rules and accompanying taxes and penalties for early withdrawal.

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