You might remember my recent blog post about how you’re never too young to start saving for retirement. This past week, I decided to start getting serious about my retirement savings account, so I started looking into what kind of options were available to people my age.
Most college students and young workers don’t even think about retirement savings. Until recently, I had thought that I wouldn’t start saving for retirement until I got a job that offered retirement plans and benefits. After learning more and more about money management and saving for retirement, I’ve determined that the younger you can start your retirement account, the better. And that’s why I’m looking to start one super-duper soon. Like probably this weekend.
So where do you put your retirement savings? Sifting through different retirement options can be a little bit overwhelming if you don’t understand the basic terminology. Here are answers to some common questions that young people have about retirement savings… since, like I said, you’re never too young to start saving for retirement!
What’s the difference between regular savings and retirement savings?
Remember that $5 savings plan I told you about? Where should you put those $5 bills? Let’s find out!
For starters, let’s think about how a regular savings account works. You take your after-tax money, and deposit it into a savings account. When the account earns interest, you pay taxes on that interest.
Retirement accounts can be deemed “savings accounts” too. According to the LA Times, you should think about your retirement account as the “bucket” that you put investments into. Therefore, since you’ll likely make an investment or two by purchasing stocks, mutual funds, or CDs, your retirement account can potentially have a much higher yield than that regular old savings account, which earns money by accruing interest.
Retirement savings accounts such as IRAs or 401(k)s can also have a bigger payoff because you’ll save more on taxes. While these accounts aren’t completely tax-exempt, you’d save more on the taxes you pay on retirement funds, than if you were to put those same savings into a regular savings account.
What types of retirement savings are best for young people?
There are many different retirement options out there, but there are a few common ones which really stand out for young folks looking to get a jump on retirement savings. While you can use these accounts to make any number of investments, let’s take a look at a few common types of accounts, which you can use to start socking away your hard-earned dough.
Well, what exactly is an IRA? It stands for “Individual Retirement Account.” There are a few different types of IRAs, but let’s look at some of the basics of this savings account choice.
IRAs are tax-deferred retirement accounts that allow individuals to set aside money for later withdrawal. What this means is that you can deposit earnings without first paying taxes on them. Once you reach the age of 59 ½, you can start withdrawing your savings. At that point you will have to pay taxes on the money.
Now let’s turn to the IRA’s cute little sister, the Roth IRA. A Roth IRA works in the exact opposite fashion: You deposit funds after taxes, but upon withdrawal, you can have the funds tax-free. To put it simply, in a traditional IRA, you’ll pay taxes up front. In a Roth IRA, you’ll pay taxes at the end. Understood?
A Roth IRA is generally a smart investment for young people. It makes sense to contribute to a Roth IRA if you expect that your taxable rate when you need to take out money will be higher than it is now. Another reason a Roth IRA may be good for young people? You can actually take money out of it, without penalty, if you’re using it to buy your first home. However, if you are extracting money for this purpose, the funds can not exceed $10,000.
Since 401(k)s are usually employer-sponsored, not all young people may have access to this type of savings account. If you’ve got a full-time job with benefits, however, this option may be available to you. When it comes to retirement savings, this is unmistakably one of the best places to put your money.
So what makes a 401(k) so awesome? Well, in essence, you are getting free money. For depositing into your 401(k), your employer will typically match some set amount of it. The conditions may be that they’ll match you for fifty cents of every dollar, or maybe they’ll pay in 4% of your salary. Either way, any contribution from your employer is free money, which counts BIG.
Another plus is that contributing to a 401(k) is nearly effortless. Once you decide to start contributing to your very own 401(k), you’ll decide on a percentage of your income which will be automatically deducted from your paycheck and deposited as a contribution to this account. You just need to decide what type of investments to make. And keep in mind that if you are young, it makes more sense to make a few risky investments, since they can have a big payoff and you’ll have time to recoup your losses if it doesn’t work out.
How can you get started saving?
Many of these savings accounts require a set amount of money to get started. Once you are ready to invest, however, you can do so at most financial institutions. Be sure to comparison shop, since not all banks are created equal. According to one of my favorite blogs, Get Rich Slowly, here are some important questions you should ask before picking a place to put your money.
- Is there a minimum initial investment or minimum contributions?
- Are there annual fees associated with the account?
- What investment options are available?
- Is the provider reputable?
These are all important factors in picking out a retirement account. Do your research, and speak with experts at some local financial institutions. The sooner you get started on retirement savings, the more you have the potential to grow your money. Opening your retirement account can help you be prepared for the future, so why wait? Start saving for retirement today.