Pay Yourself First With Your Retirement Plan 

You work hard to earn your paycheck. But where does all the money go? Before your check even gets to you, Uncle Sam has taken a chunk. Then, you have to take care of the mortgage, car payment, daycare, groceries, telephone, and a stack of credit card bills. How much is left? If your answer is not much, you need to start paying yourself first. How? Through your company's retirement plan.

When you save through your company's retirement plan, your contributions to the plan are tax deferred. The money you contribute is put aside before you get your paycheck and before taxes are taken out. You pay no income tax on your retirement plan contributions until you withdraw the money from the plan. Also, there's no current tax due on any employer matching contribution.

Having your retirement savings tax deferred means you pay less taxes on your income. For example, Leon earns $30,000 a year and decides to contribute 5% or $1,500 a year to his retirement savings plan. Leon will have to pay income taxes on only $28,500. The $1,500 will not be taxable to him as long as it stays in the plan. In a 28% tax bracket, Leon's tax savings on the $1,500 will come to $420.

By saving through your company's retirement plan, you are able to set aside more for retirement than you would by saving in a bank or a mutual fund. This is because money goes into your retirement plan before taxes are withheld. You must use after-tax money for savings in a bank account or mutual fund. And, while your money remains in the plan, all investment savings are tax deferred as well. Over time, tax-deferred growth makes quite a difference.

Leon's co-worker, Anita, decided not to save for retirement through the company's retirement plan. Instead, she paid taxes on her $1,500 of salary and invested what was left ($1,080) in a taxable mutual fund. Even though Leon and Anita saved for the same number of years, Leon accumulated a lot more than Anita because she had to pay federal income taxes on her savings and investment earnings. When Leon retired 30 years later, he had about $40,000 more than Anita even after paying income taxes on retirement. The accompanying chart shows in detail the difference between tax-deferred and taxable retirement savings.

This is a hypothetical example. The investment results are for illustrative purposes only and are not representative of any particular investment vehicle. Your investment performance and account balance will differ. Rates of return will fluctuate with market conditions. Source: NPI

You work hard, and so should your money. Saving for retirement through your company's retirement plan is a great way to put your money to work for you. By taking advantage of the tax deferral your plan offers, you stand a better chance of accumulating enough to have the retirement you've always dreamed of. And, in the meantime, you can enjoy the benefits of paying less in federal income taxes. Take advantage of this opportunity to pay yourself first and Uncle Sam later. Join your plan or increase your contribution soon.

Emily S Hazlett is Vice-President:Investments at ENB Insurance Agency, Inc. a wholly owned subsidiary of Evans National Bank.