Saving

Never Too Young to Start an IRA

You are never too young for an IRA and the earlier you start preparing for retirement, the better it is for your financial freedom. Investing for retirement should never be put in the backburner till you turn 25 or 30 or settle down with a permanent job. IRAs are a great option to start investing your money as they are really easy to open and operate while requiring small investment only.

There’s no point fence-sitting till everything falls into perfect alignment because even a $400 dollar annual contribution towards your IRA account is enough to start with. Young investors focused on long term gains have numerous choices in front of them but the most preferred among them is Roth IRA.

Roth IRA – Perfect choice for young investors

Roth IRA makes perfect sense for young investors as it is one of the most straightforward investments that anyone can think of. You will be taxed on the money you contribute towards your Roth IRA and as long as you adhere to the guidelines, you will never be taxed on your withdrawals after you retire. Younger individuals can benefit for Roths by investing on the businesses that offer long term gains through capitalization on the market’s movement. Leveraging the market to make good gains while not having to pay any tax on withdrawals is simply awesome.

3 Stellar Advantages offered by Roth IRA

  • Simplicity

It is really simple to avail tax free withdrawals after retirement instead of just calculating what you will need after the taxes and sending off the estimated payments to IRS.

  • Easy Withdrawal

You will be able to withdraw your contributions at any time from your Roth without paying any penalty. Even the early-withdrawal penalty of 10% can be avoided if you are buying a home for the first time or you are disabled. This benefit is available in case of deaths as well.

  • Lower Tax Rates

The federal income tax rates are extremely low. Your present tax might be higher than what you will be paying at 59 ½, so that’s a much easier option.

The maximum permissible limit of investing in a Roth is $5500 every year and for people above the age of 60 can deposit $6000. You can walk into your nearest bank any day of the week and open your IRA certificate of deposit. The primary aim of IRA is to encourage investment, so invest whatever you can, even when you are in your early 20s.

Graphic: How Much Salary Do You Need to Save for Retirement By Year

The image is a line graph indicating that salary for retirement you will need to reach your ideal retirement savings plan. The image shows Yearly Salary Saved on the y axis, in percentages and years needed on the x axis, in increments of ten.

The years needed axis begins at zero and ends at sixty, therefore it is assumed that the age of retirement for this chart is sixty.

The number of years needed decrease in proportion to the amount of money saved. A person who saves twelve per cent of their annual salary, for example, must save for a total of forty per cent to reach their goal.

A person who saves less, will take fifty years or more to reach their retirement savings goal.

Work 401K Offers Tradition & Roth Options: How Does it Work and Where Should I Contribute?

If you are not eligible for a Roth IRA but considered as high wage earner, there is an opportunity for you to create your own Roth IRA. You can invest in 401k taxable investment account that can offer you to build your own Roth contributions that will become beneficial for you upon your retirement.

Considering the 401k you should learn its two types so you can choose which option is the best for you. Here are the two plans you can choose from:

  • Roth contributions. In this kind of option, it is good combination of traditional contributions that offers maximum limit on your 401k. Choosing this kind of contribution will allow you to pay your tax but there is no longer a need for you to pay your tax once you have decided to withdraw your contributions.
  • After – tax contributions. This option will provide you higher limit that can reach $53k for your total contributions. If you decide to roll your contribution to your Roth IRA on your retirement, you will achieve similar Roth benefits.
  • Roth 401k. In this option, you will have the opportunity to achieve big amount of money from your Roth IRA as you expect. Thus, if you have employer that has good 401k options, you can roll in your own account of IRA into your 401k that makes it easier for you to roll them back and then out play the backdoor contributions of your Roth in the near future.

So if you are high wage earner, it is best for you to opt with the traditional contributions that only ask for $18k. But if you are expecting to pay higher rates upon your retirement then you can choose the after – tax contributions. However, your decision about which plan is best option for you will still depends to the current situation you have right now.

On the other hand, many people find the after – tax contributions attractive in some other ways. It is because it has IRS regulations that make it enjoyable and at the same time allow all the retiree to segregate effectively after your tax assets from pretax monies once you decide to rollover it into IRA. As you opt for pretax 401k assets, both of your investment earnings and pretax contributions will be rolled in a traditional IRA wherein you can convert it into your Roth IRA.

Meanwhile, for you to ensure that you will get the effective return from your pre-tax  contributions on your current marginal rate and can lessen your average tax rate for your retirement, you should ensure that you are high wage earner. It is because the marginal rates are always higher than the average rates that create sense to build your Roth.

Overall speaking, having high income will allow you to choose traditional 401k that reduces the taxes you pay that seems higher during your retirement. Once you are done with this process you can now proceed with after-tax Roth then reach the 401k and IRA that makes it beneficial in your account.

 

Graphic: How Much Should You Have Saved Up for Retirement Today

The table shown in the image is a savings calculator tool. The table aims to be a guideline to help savers understand how much money they should have saved in preparation for retirement if they have been saving about five percent of their salary.

How Much Should You Have Saved Up for Retirement Today

The table is broken into two categories; on the y axis is the age category, beginning at thirty years and ending at sixty five years, with five years intervals in between; on the x axis is salary, starting at fifty thousand dollars and ending at four hundred thousand dollars.

To use the table a person must first find the number closest to their age on the y axis and then the number which closest approximates their salary on the x axis. At the intersection of these numbers will be another number, which, when multiplied by the salary, will indicate the amount of money a person should have saved.

Graphic: Growth of a Retirement Account From the Age of 25

Saving is always important. It is considered a good practice to consistently set aside part of each of your paychecks when you are young to have money later. It is equally important to continue saving even after you grow older. As This chart from Business Insider shows, there are major differences between individuals who not only start to save money early on, but continue to save money throughout their career.

Graphic: Growth of a Retirement Account From the Age of 25

A twenty-five year old who saves five thousand dollars annually between the ages of twenty-five and thirty five is expected to have a nest egg of one million dollars by the age of sixty five.

A person who starts saving from age thirty five will have considerably less at five hundred thousand or less, but will still have a good cushion for retirement.

Saving early can actually turn into earning later on. Simply this is because the longer investments have to mature, the higher the return they will have. On average a person who only saves and invests $5,000 annually between the ages of 25 and 35 will actually have more money than someone who starts saving at the same rate from age 35 to 65.