Oh retirement accounts! What a sexy subject to talk about!
Woohoo, 401Ks- so hot! Steamy, racy Roth IRAs! Let’s put away a bunch of our hard-earned money in an account we don’t touch for 30 years! Don’t take that fancy Miami Beach vacation or buy those sizzling Leboutin shoes- fund your old age instead! Forget traveling the world now- save your money for when you’re 70!
No wonder no one wants to talk about putting away money for retirement. It’s depressing. And mysterious. Retirement accounts are neither straightforward nor seductive and they weren’t taught in school. So what should we do? Should we quit on them? Take a vacation instead? Carpe diem?
The answers are out there, you just have to dig a little. If I hadn’t started listening to podcasts a bit over a year ago, I probably never would have started a retirement account. Retirement funds just didn’t seem important or pressing. After all, I’m self-employed, so I can’t have a 401K anyway..right? And I’m young, so I have plenty of time…?
The podcasts of Suze Orman and Dave Ramsey set me straight and changed my attitude fast. Now, I’m no expert, but if there’s one thing I’ve learned from Suze and Dave (and multiple other financial experts) it’s that retirement accounts are really frigging crazy important…way more so than I ever knew. You don’t want to get to retirement age and have nothing to live on! That wouldn’t be good. And social security isn’t enough, nor is it reliable.
So it’s very important to start funding your retirement account. Here are two important and easy first steps:
1. If you’re earning money, start or continue funding your retirement account now. The thirties are definitely NOT too early a time. Some people started in their twenties or earlier, and they are way ahead. Any little bit helps…do what you can afford.
2. Don’t get overwhelmed. If you make very little money, it’s okay to start small. Jane is currently a screenwriting grad student, and is busy studying her craft. She was worried about not being able to put much into a retirement account while she’s still a student. But it’s okay! If you’re currently a student (and making very little to no money), relax! Graduate first and find a job before worrying about your retirement account. You get a free pass for awhile when you’re in school…it’s not worth stressing about. Just start contributing once you can afford it.
As I said before, I’m not an expert, but since starting to understand retirement accounts, I’ve done dozens of hours of research on the topic…choosing the best place to open a retirement account, understanding my options, thinking about tax benefits, and much more. It can get dizzying, but is actually much simpler than it seems once you get the hang of it.
There’s a lot to talk about regarding retirement accounts and I’ll only scratch the surface now (spoiler- there will be more info next week).
So first off, some questions for you to consider:
1. If you’re employed, do you already have a retirement plan through your job?
a) If yes, do you know how much you’re contributing? Do you know what investments are in your plan? Does your employer match your contributions?
b) If no, why not? Does your employer not offer a plan? Are you funding an individual retirement account (IRA) instead?
c) If you’re unsure, find out!
2. Are you self-employed?
a) If yes, have you started a retirement plan for yourself?
3. Are you currently a student or unemployed?
a) If yes, are you stressing about retirement accounts? (Hint: don’t. I already explained why above.)
These questions will start you on the path to understanding your retirement account options. There are many options, but below are detailed descriptions of the most common retirement accounts:
- A 401K is a standard retirement plan offered by many employers.
- If you are currently employed (but not self-employed), see if your employer offers a 401K. Most do, but you won’t usually be automatically enrolled! So ask!
- Many employers will contribute some sort of match when you put money into your 401K. If they do, always contribute at least up to the match! You’re getting free money!!
- As of 2014, you can contribute up to $17,500 to your 401k. To hit the max, you would contribute $1,458 per month or $729 per paycheck if you are paid twice per month.
- The money you contribute to your 401k is tax-deductible. You don’t pay taxes on it now. You will have to pay normal taxes on it when you take it out during retirement.
- If you withdraw money from your 401k before age 59.5, you will have to pay a 10% penalty, plus pay taxes on the money withdrawn!
2. Regular IRA (Individual Retirement Account)
- An IRA is an account you open up on your own, not through your employer. As of 2014, you can contribute up to $5,500 annually.
- You do NOT have to be self-employed to open an IRA.
- You can have a 401k at work and ALSO open an IRA. You will still be able to contribute the maximum to both. But if you have to choose (i.e., you don’t have tons of money to spare…I can relate), I recommend (Suze Orman always recommends this) you contribute to your 401k up to your employer match, and then put any additional money into an IRA (or even better, a ROTH IRA, explained below).
- The money you contribute to your regular IRA is tax-deductible. You don’t pay taxes on it now. You will have to pay normal taxes on it and any money it earns when you take it out during retirement.
- If you withdraw money from your regular IRA before age 59.5, you will have to pay a 10% penalty, plus pay normal taxes on any money withdrawn!
3. ROTH IRA
- Just like a regular IRA, a Roth IRA is an account you open up on your own, not through your employer. As of 2014, you can contribute $5,500 annually, BUT—
- If you have a regular IRA already, you can’t contribute $5,500 a year annually to BOTH- it’s $5,500 TOTAL. So you have to choose..or have a little money in both.
- You can have a 401k at work and ALSO open a ROTH IRA. Same deal as above…you will still be able to contribute the maximum to both, but make sure you take the employer match on the 401k first before putting additional money in the ROTH IRA.
- The money you contribute to your regular IRA is NOT tax deductible. You pay taxes on it now like any other money. However, YOU WONT HAVE TO PAY TAXES ON IT OR ANY MONEY YOU’VE EARNED FROM IT WHEN YOU WITHDRAW DURING RETIREMENT. This is very important, because and it’s what makes the Roth IRA so neat.
- If you withdraw money from your ROTH IRA anytime, it’s ok! As long as you withdraw money you’ve deposited and not money earned, you’ll have NO penalty or taxes! So Roth IRAs are kinda magical, cause they double as a savings account.
That was a lot of info. I’m going to stop here before this gets way too long and overwhelming. Please ask any questions you might have, and I’ll continue next week! I’d love to hear from you, and your comments help me know what to talk about in other retirement account articles.
Was this helpful? Did you already know all this? Please let me know either way. Thanks for reading! 🙂