How to start your retirement accounts

You could wait another week, or you could start today. Here are the basic steps you have to do to start your retirement planning. This article assumes you don't yet have a 401(k) and will start with an IRA. If you DO have a 401(k), contribute THERE first, then move on to the IRA.


Don't care where you go - I like Fidelity, but Vanguard and TRowe Price and the other big guys are very similar. 

But here's your plan: 

1. Save up $1,000 that you don't need for an emergency.

2. Open an IRA with one of those big guys.

3. Select a Target Date fund (They'll say something like Target Fund 20XX with XX being roughly the year you turn 60) and those types of funds will select a basket of stocks/bonds/mutual funds appropriate for your age (risk tolerance) and rebalance for you as you near retirement.

Done.

Well, you're done with the biggest piece. Here's the next step:

4. Go through the process again with your spouse if you have one. (IRAs are hooked to the individual.)

Done.

5. Okay, you've done the second biggest piece! NOW you ought to find room in your budget to contribute to your IRA. Every dollar helps. It could be $25 per paycheck or $100 month. Whatever would be comfortable to you. You can probably set up automatic deductions out of your paycheck. The government at this time only allows taxpayers to fund their IRAs with $6,000 per year per person. The number will grow as the dollar continues to inflate.

Now you're really done.


Mostly. You're like 90% done. The rest of this is just more information that weirdos like me enjoy knowing. You might think, "I don't care! I went through your steps and now I'm closing my browser!." That's ok. No one needs to be as in depth as I do.


The other 10%

You'll get to a point where you'll say, "I have more savings! Where do I put it?"

Here's a handy picture created by Fervent Finance, but the maximum allowed contribution amounts are from 2017:



As you can see there are a bunch of different types of retirement accounts but at most you'll ever have will probably be 3 or 4 per person in your household.

They split out first being either Tax Deferred or Taxable accounts.

Tax deferred means you contribute to them with your paycheck BEFORE the government takes taxes out. Most common plans for those are: 

401(k) {A for profit corp gives these to employees}, 
403(b) {A non profit corp gives these to employees} 
and Traditional IRA {The I stands for Individual. You fund this yourself after your paycheck, then when you file taxes, you get a deduction, depending on your Adjusted Gross Income.}

Taxable means you contribute your money after the government takes out taxes. Most common plans are:

Roth IRA {You fund this yourself as well}
Roth 401(k) {Rather new to the scene, for profit corp gives these to employees}


So what's the benefit/drawbacks of tax deferred vs taxable?

It's all about what tax bracket you're in when you are contributing vs the bracket you think you'll be in when you retire.

Tax deferred:
For 20+ years the thinking is as your income grows, your tax rate goes up from 10% to 15% to 25% and eventually you're getting taxed 35% of your income! (Kind of.) But the day you retire your income goes to 0 and now you're back in the lowest tax bracket. So, when you start withdrawing from your Traditional IRA, your 'new income' is taxed around 10 or 15% (hopefully). Also, while you weren't being taxed on that money you were stuffing in your IRA, you were getting a break on the money that you were earning. If you didn't put the money in your IRA, you would have gotten it in your paycheck and paid taxes on it when you were in a higher tax bracket.


Taxable:
But there's a point to using taxable accounts as well. After paying taxes on the money and putting it into a Roth IRA, when you retire, your contributions AND earnings come out tax free! You've paid your taxes on your contributions, and your earning come out without paying taxes!


For both types of accounts, though, you can't withdraw until you're 59.5.

You don't have to choose one or the other for the entirety of your life, either. 

Special consideration for 401(k) and other employer sponsored plans:

Some employers give employees a "match" - a particular percentage of income depending on how much the employee contributes. It could be substantial or not, but as long as it's not 0%, that is money that they are giving you that you wouldn't have had otherwise. Sure, like the money you contribute, you won't see it until you're 59.5, but it's still money!

This is why so many people harp on "Are you maxing out your contribution to get the match?" They can make their contribution any way they please, and there's something called vesting. They'll give you the money in your account, but you have to work there for a set number of years (usually between 2 - 4) before the money is actually yours.


Have you set up your retirement accounts yet?

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