Retirement planning is usually not on the minds of most twenty-somethings. There is just so much on your plate: family, bills to pay, including student and car loans. You’re trying to build an emergency fund and possibly saving up for a house. Retirement is so far away in your timeline, it’s tempting to put it off or keep your contributions to a minimum, but that’s not the best move for your finances both now and years down the road.
When we started filing our taxes as a couple a few years back, we were advised to contribute more to retirement. She explained to us that it could lower our taxable income and set aside our money for retirement.
Pay Debt or Invest for Retirement?
You can’t grow your money until you’ve gotten out of the quick sand. The average credit card debt forAmerican household is around $10,000. With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.
The only exception I would consider to that general rule is to put in enough to money in to get your company’s match. It’s doubling your contributions.
Where Should My Money Go?
Assuming that you’ve gotten out of high interest debt, you may now want to go ahead and optimize your money. We searched to find some answers. Some financial gurus encourage the following process to maximize your retirement contributions.
- 401(k) up to the employer’s match
- Roth IRA up to the year contribution limit
- Rest into 401(k)
401(k) Contributions – How Much?
Start small if you’re cautious and decide what will work well with your budget. Some financial experts suggest put 5- 10% of your paycheck into a retirement account. You can always increase the amount as you make more money. When I made it a year into my internship, I called the human Resource Department to get started with the company’s 401(k) plan. I was fortunate that I qualified to participate and I wanted to take advantage of it.
If you don’t qualify for a 401(k) at work, though, you can still open an IRA. Opening an IRA isn’t hard at all and it can be a huge benefit for you. You have to decide if you want to open a Roth IRA or a traditional IRA.
Roth IRA vs Traditional IRA- Which is Better?
The main difference between the two IRAs has to do with when you’ll be taxed:
- Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
- Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
Right now you can contribute $5,500/year to a Roth IRA if your modified AGI is:
- $178,000 for married filing jointly or qualifying widow(er),
- $112,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
- $10,000 for married filing separately and you lived with your spouse at any time during the year.
Sources: IRS Publication 590 and Wikipedia
Where to Open Your IRA
If you don’t have an IRA open, then here are some places to consider and look into:
- E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
- Vanguard (Some funds require $3,000 minimum)
- T. Rowe Price
- Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)
- Sharebuilder (No minimum to open; no admin annual fee)
Deadlines for Contributing to Your IRA
Remember, you can make contributions all the way up to April 15 or whenever you file your taxes.
Photo Credit: mynameisharsha