One of the best ways to stay poor is to fall prey to things done to you in percentages. Anything you pay in life expressed as a percentage is an evil to be avoided. This sage advice is exponentially true when it comes to money that isn’t making it into your portfolio because the money going out isn’t subjected to the magic of compounding on your behalf. This can amount to hundreds of thousands of dollars over your career if you don’t avoid things like fees and taxes. Uncle Sam is greedy. He’ll rob you blind and force you to eat Alpo when you are old if you don’t learn to take advantage of some awesome tax laws that keep the greedy hands of the IRS out of your portfolio.
As we have already discussed above, 401(k) contributions are not taxed, and employer contributions to them are not taxed. That is 20% of your yearly income (depending on your match) that is tax-free. If you are not contributing to your 401(k) up to the maximum match that your employer will give you, then put this book down, proceed with all haste to the human resources office, and fix your stupid mistake. If you are self-employed or your employer does not do a match (I suggest looking for a new job—the match is that important), then you can open your own tax-advantaged account.
An individual retirement account (IRA) is an investing tool used by individuals to earn and set aside funds for retirement savings. There are several types of IRAs, but we will focus on Traditional IRAs and Roth IRAs. Sometimes referred to as individual retirement arrangements, IRAs can consist of a range of financial products such as stocks, bonds, or mutual funds. If you aren’t already saving 15% of your salary, you should open an IRA and put the difference between your 401(k) and 15% in the IRA.