Pay Yourself First
by Hien T. Do

When most of us get our pay checks, we first tend to think about how we will spend our money. Many of us spend more time planning our vacation then time spent on planning our retirement. But many people are missing out on benefits they are entitled to in the current tax laws. One such benefit has to do with when the Federal government collect tax from your income. The tax collection can be deferred on income that has been set aside for retirement purposes. Some of the most popular plans includes Individual Retirement Accounts (IRA) for the general public, 401K for corporations and Thrift Saving Plan (TSP) plans for Federal employees. By paying into these plan or paying yourself first, the income is not taxed until you withdraw the money when you retire which is classified at 59 1/2 years old. Because your income will be significantly lower when you retire, the tax bracket will be lower and thus lowing the amount of tax taken from the money you earned.

To help you decide on a retirement plan, you should check with your company to see what plans they have available. Some companies offer a plan where they will match a percentage of your contribution. The most popular plan is a 401(k). Also check with your bank or credit union to see what plans they offer. While you are shopping for a plan, your contributions to your plan must be considered a permanent expense, but also look at it as paying yourself first. Also remember that automatic payroll deductions are the painless way to make your contributions.

Your education plan doesn't have to be a separate plan, but most financial institutions recommend diversifying your investments. If you are ready for big deposits, look into mutual funds. If not, a payroll deduction can be made as an allotment or direct deposit to a savings account. That way you can start off small until you save enough to make a larger minimum deposit in an IRA, certificate of deposit, or mutual fund.

"Pay yourself first" by investing in an IRA and get tax benefits, too.