Category Archives: Retirement

Roth or Traditional IRAs: Which One Should You Choose?

First things first: kudos to you for looking into a long-term savings account. You’ve made the initial step toward growing your net worth and saving for retirement. The question is, which kind of IRA is best for you: Roth or Traditional? If you’re like most Americans, you hardly know the difference between the two.

The answer truly depends on your current circumstances. Both kinds of IRA accounts have their pros and cons, so you’ll need to evaluate your situation and determine which is the best fit. Here are a few ways to do that.

Think About Your Current Tax Bracket

The biggest difference between Traditional and Roth IRAs is the tax break. When you put money away into a Traditional IRA, your contributions are tax-deductible today. That means you’ll have more money in your pocket right now simply by saving for retirement. However, you will pay taxes on that money once you withdraw it upon retirement.

With Roth IRAs, the money is taxed upfront, which can be a bummer. The nice thing is that you won’t pay taxes when you withdraw the money after you’re retired. You’re basically biting the bullet while you’re young.

Although you might be tempted to go for the Traditional IRA’s tax deductions right now, consider this: are you going to be in a higher tax bracket now or when you’re 65? Chances are, your tax bracket is lower now, so you’re technically saving money in the grand scheme of things by paying your taxes ahead of time with a Roth IRA.

This doesn’t necessarily mean that a Roth IRA is the smarter choice. It truly depends on your current situation, including your tax bracket now and later.

Consider Your Income

How much money you earn yearly can influence your decision. As long as you’re younger than 70.5 years old, you can contribute to a Traditional IRA, no matter how much money you earn (with or without a partner). Roth IRAs, on the other hand, cap the income-eligibility restrictions at $137,000 per person. If you make more than that individually, you’ll need to look into other options.

Look at the Contribution Withdrawal Penalties

Sometimes, life forces you to reach into your hard-earned savings earlier than you planned. If you need to take money out of your Roth IRA (up to $10,000), you won’t be charged any additional penalties or taxes, even if you’re under the age of 59. With a Traditional IRA, you’ll be charged a 10 percent penalty fee for the first $10,000 you withdraw before 59. You can technically work around this penalty with certain situations, such as disability, buying a home, or medical expenses. Still, you’ll pay taxes upon distribution.

Do You Plan to Keep Saving After You Retire?

Let’s say you want to pass money onto your future heirs, or perhaps you have another source of income you’ll use to fund your retirement. In that case, a Roth IRA might be the smart way to go. You can contribute money to the account up until you die. With a Traditional IRA, you can only contribute money until you’re 70.5.

In Conclusion

Putting money into any kind of IRA is a smart move for your future. Deciding between Traditional and Roth is more circumstantial. Would you rather pay your taxes now or later? Are you planning on withdrawing the money before you’re 59? Will you move into a new tax bracket?

There isn’t a right or wrong answer to any of these questions. They’re all just factors to consider before opening a new account.

Why You Shouldn’t Wait to Start Saving for Retirement

During your twenties, everyone has some kind of advice they want to impart upon you. Whether it’s “live in the moment!” or “find a job you love,” those older and wiser seem to have a million tidbits of knowledge they want to share.

However, one thing many adults don’t stress to recent college grads is the importance of saving for retirement right away. Although living in the moment and focusing on your passions is important, many twenty-somethings miss out on the opportunity to build wealth with very little effort.

Compound Interest Is an Amazing Thing

Many people don’t want to save for retirement soon because they don’t know how the process works. They hear phrases like “compound interest” and “IRA” float around, but they don’t truly understand what they mean until they’re older.

As soon as I began to understand the massive impact of compound interest, I felt like I had no choice but to start saving aggressively. Think about it this way: a 25-year-old who puts away $5,000 one time and never saves again will have more money saved after 40 years than someone who waits ten years and then saves $500 per year for the next 30 years. Just think about how much wealth we could all accumulate by the time we’re middle-aged if we all started saving aggressively while we’re young!

Investing Takes Time to Learn

Ask many twenty-year-olds when they start planning to save for retirement and they’ll say “later.” The problem with this answer is that it not only puts you behind in your goals, but means you’ll have to save even more later to make up for it. No one can become an expert at saving and investing overnight, which means your profits will most certainly be delayed even after you start saving.

When I started saving in my early twenties, the process of learning to invest my IRA contributions overwhelmed me. I spent hours researching the best tactics and made several bad choices before I began to see any growth. That’s why I’d recommend that any college grads (and even college students) start to build a retirement fund way in advance. This gives them wiggle room to learn and make mistakes before they really need to sock away large amounts of money.

Social Security Isn’t a Guaranteed Benefit in Our Future

Although Social Security payments might seem like a given, the Social Security Act was only created in the 1930s. According to some experts, it has grown past its original intent, and although it may be there to support this current generation in their retirement, it’s not a guarantee. Many things can change in the next 50 years, so everyone needs to have their own backup plan for retirement that doesn’t rely on help from the government.

The Bottom Line

Unlike some people, I fortunately didn’t wait until I was very old to start saving. Still, I wish someone had told me to start saving as soon as I possibly could. This would help me reap more benefits and feel totally secure in my ability to retire on my own terms someday. The median retirement savings for most Americans in their 30s is only $45,000. By just starting to save five or ten years earlier, you could make a staggering difference in your savings. Don’t regret your choices like me; instead, open your IRA or 401K today and start preparing for your future.

What Does “Employer 401(k) Match” Even Mean?

First of all, congratulations! If you’ve just started a new job that offers a 401(k)-matching program, you’ve taken a big step on your journey to building wealth and likely a move in the right direction for your career too! You’re probably pretty keen on how your new job helps your career but the 401(k) aspects may seem a bit more hazy – not to worry! We’ll cover what this means and why it is important to your financial future.

A 401(k) is an investment vehicle with meant to help employees save for retirement (and it’s tax-deferred, so the more you contribute, the less you’ll pay in taxes this year – instead you’ll pay taxes when you withdraw the money in retirement). As employers and the economy at large shift away from pension plans, 401(k)s have exponentially grown in popularity. While there may be a few disadvantages (keep in mind, there are disadvantages to everything if you look hard enough), 401(k)s are widely accepted as a win for the individual controlling their own 40retirement fate.

Put simply, you yourself can elect to have your employer automatically deduct a percentage of your pay checks and invest in the 401(k). For instance, you might tell your employer to put 10% of your gross income from each and every one of your paychecks into the 401(k) plan.

Pay Close Attention To Matches Offered

As an investment into their employees’ futures and as a part of their total benefit package, many companies will match a percentage of an individual’s contribution to their 401(k) plan. Here’s an example:
Penny works for 321 Ventures and earns a $50,000 salary each year. She chooses to contribute 10% of her pre-tax income to the 401(k) plan.

Her employer’s rules state that they will match 50% of her contributions with a maximum employer contribution of $4,000 per year. This is the employer’s safety net. Because they don’t want to spend too much, the place a cap on matches. Most employers do this.

In Penny’s example, she will contribute $5,000 of her own money. Her employer will contribute 50% of her contribution, so $2,500. At the end of the year, her 401(k) balance will be $7,500 (pending gains or losses from the investments within her portfolio).

Let’s look at Marshall now, who has the same position as Penny at 321 Ventures and earns the same $50,000 salary. However, Marshall instead contributes 20% of his income to the 401(k) plan. Way to go Marshall!
Marshall’s investment will be $10,000 of his money plus the maximum employer match of $4,000. Marshall saved $14,000 this year to his plan! Because 50% of Marshall’s investment is over the $4,000 employer cap, the employer match will be the $4,000.

Every Employer Sets Its Own Rules

Please note that each employer sets their own thresholds. The example above of 50% with a $5,000 cap is a common set-up, though your employer may have different rules. Consult your company’s HR department or carefully read your employment contract if you are unsure of the employer match being offered for your job.

401(k) employer matches are so great because it is basically free money. It is a benefit that is technically a factor in your total employment package, but nonetheless it is money that you otherwise wouldn’t have. If it is possible for your personal financial situation, the best decision is always to contribute enough to at least get the employer cap. Otherwise, it is money left on the table.