Saving for Retirement: The Traditional IRA

Today, I will go over the Traditional Investment Retirement Account (IRA).  Yay!

The Traditional IRA: This account, like the Roth IRA, is an account that you can open up with most banks.  (Remember that a 401K is one that is opened up through your workplace.)  Banks will likely give you a bunch of investment options, ranging from CDs to money markets to mutual funds to stocks and bonds, and you can choose what you'd like to invest in based on your own preferences of risk and return.  The IRA is kind of a blend of the 401K and the Roth, and I'll explain why.

Pros: Like the 401K, your contributions are deductible.  That means you can adjust your income to deduct any contributions to your IRA, which will reduce your taxes.  Because your money is growing tax deferred, this means that the gains on your account will be larger.  Unlike the Roth, there are no income eligibility requirements, so if you're making $50K a year or $250K a year, you'll be able to contribute to the IRA as long as you're under 70 1/2 (don't ask me why they make up these weird age limits).  The max amount you can contribute during 2014 is the same as the Roth - $5,500 a year.

Cons: Because you are deducting your contributions (AKA not paying taxes on the money when you initially put it into the IRA), you will be paying taxes on it when you start to pull the money out.  Another requirement of the IRA is that you will be mandated to take money out once you turn 70 1/2, whereas with a Roth you're not required to do that. Consistent with the other retirement accounts, you will be hit with a 10% penalty fee if you start taking money out before 59 1/2, unless you meet one of the exceptions.

I know saving for retirement seems like a long, long way off, but it is really essential to start saving for it, especially when you're young.  The difference between starting a retirement account when you're 23 vs. 33 is huge. Like really, really huge. Some people think, "Oh, I'm still young, I'll start it when I'm 33 because I'll be able to contribute a lot more." What I say to those people is, "You are likely wrong."  Even if you're contributing a lot more when you're 33, the amount you can compound in 10 years with a smaller amount of money will likely be bigger.  My advice to you all is to open one up as soon as you can, even if you know you'll be putting just a little bit in each month.  I put aside 10% of my paycheck into my 401K.  I could decide later to put some into a Roth and some into an IRA, but this is just works for me at this stage of my life.  It's totally all personal preference, and there is no right or wrong retirement account to invest in or right or wrong amount to contribute, but something is better than nothing.

Happy saving!

Ali

Saving for Retirement: The Roth

Hello my budgeting friends!

Sorry I have been so MIA for the past few weeks.  Busy season is finally coming to a close, and I will give this blog a little bit more lovin’.  I’m continuing my posts on retirement accounts. Here we go!

The Roth: Another popular retirement account that could be of interest to you!  The greatest advantage to the Roth is that the money comes out tax free -- you put in after-tax money, let it build, and you take out all the money without paying the government a dime of it. It’s a great retirement account to have if you believe your tax rates will be high in 40 years when you retire, which is why it’s popular amongst younger people (will explain this more below). You can open up a Roth with pretty much any bank, and the amount you can contribute to the Roth varies a little bit each year.  For 2014, the limit is $5,500/year. 

Pros: As I’ve mentioned, the huge advantage of a Roth is that your money comes out tax-free when you retire, which is not allowed with a 401K. So think about it. We’re young and we’re not making big money just yet, so our tax bracket is at the lower end.  Then, imagine yourself 40 years from now.  We’ll hopefully be making big money and that would put us into a higher tax bracket. If you put money aside now in a Roth, you’ll be paying very little in taxes and when you finally pull the money out in 40 years, you won’t have to pay any taxes on it! 

Cons: Because you pay taxes before you put the money in, you will be building less.  So, for example, instead of putting $100 pretax, letting it build up, and paying the tax on it when you retire, you are paying tax on the $100 first which will really be like putting in $70, letting it build, and then pulling it out tax-free.  Building up $100 over 40 years will get you more money than building up $70 over 40 years.  Another disadvantage of this account is that there are income eligibility requirements (another reason why it’s popular for younger folks). If you are making more than $114K a year, the contribution limits will start to phase out.  And while I don’t know any 23 years olds making this kind of money, if you make over $129K, you won’t be able to contribute to a Roth at all.  Some people who know that they will be making this amount in a few years don’t even bother creating a Roth because they know they will be phased out eventually.  Like the 401K, you cannot pull any money out of the Roth until you are at least 59 1/2 and have held the account for at least 5 years or you will incur penalty fees.  There are, of course, exceptions to this rule. 

If you're interested in starting an account, there's a great website I found that will be able to answer more of your questions if you have any.  Still trying to figure out how to create an anonymous question box.  Closest thing I got was a poll (see left).

Next up the IRA!

Ali

Updates

First off, I want to apologize to the 10 beautiful people who read my blog.  I haven't put up a post in weeks, and there really is no excuse for it.  I of course have an excuse and that is that it's busy season at work, and I just haven't had the time to update.  I don't ever want to write posts that are rushed and not thoroughly researched. So I am very sorry.

Secondly, I just want to let everyone know that I won a Super Bowl Pool at work. Holla. At. Your. Girl.  $175 in my pocket. Go me.

That's all.

Have a great week!
Ali