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Millennial: Are You Missing Out on Retirement Earnings?

Millennials are showing they are better at budgeting than the average American. However, they do have a weak spot when it comes to finances — retirement savings.

In a recent study by Earnest, Amino and Earnest, it was found 71% of Millennials use a budgeting tool or keep a monthly budget compared to 41% of the remaining population. Also, 68% of Millennials could handle a $500 emergency without going into debt while only 43% of Americans can say the same.

However, it was found only 31% of Millennials have begun saving for retirement.

Millennials by the Numbers:

  • 71% — keep a monthly budget or use a budgeting tool
  • 68% — could handle a $500 financial emergency
  • 31% — are saving for retirement

Source: Earnest, Amino and Earnest study

So how exactly should a Millennial begin saving for retirement effectively?

How to Start Investing for Retirement

There isn’t a sole Millennial to Millionaire option. However, a step in that direction starts with educating yourself on investment opportunities.

One option to look at is investing in an Individual Retirement Account (IRA). IRAs serve as a holding account for individuals investing in their retirement.

The most common IRA options are Traditional, Simple and Roth. Before investing in an IRA, it is important that you educate yourself on the different IRA options and understand the limitations and guidelines of each.

Who Can Open an IRA?

Eligibility is based on the type of IRA you are opening. Traditional IRA limitations are determined by age; you must be under the age of 70.5 to open a Traditional IRA. Whereas, anyone can open a Roth IRA at any age, but they may have income stipulations. Simple IRA guidelines are determined by the employer and may be dependent on years of service or age.

Consider talking to a financial advisor when evaluating the best option for you. He or she can help outline the pros and cons in IRAs so you can choose the best retirement savings path for you.

Traditional vs. Simple IRA vs. Roth

A Traditional IRA is set up by you, the sole contributor, with your pre-taxed income used toward investments. You then pay income tax when you withdraw the money.

Roth IRAs, derived from the Taxpayer Relief Act of 1997, are comparable to Traditional IRAs with the differentiating factor being how they’re taxed. Roth IRAs are funded with after-tax dollars so withdrawals are not taxed.

Simple IRAs, which stand for Savings Incentive Match Plan for Employees, are established by small business owners for employees. Both the employee and business owner contribute to the account.

IRA Contribution Limits

All IRAs have contribution limits that establish a maximum amount of funds you can contribute each year.

The contribution limits for 2018  are $5,500 for Traditional and Roth IRAs. If you made less than this amount, the limit is your taxable compensation for the year. Contribution limits do not apply to rollover contributions and qualified reservist repayments. Simple IRA contribution limits will depend upon your employer’s IRA plan.

To adequately allot the appropriate amount of funds to reach your retirement savings goal, you should plan out your investments for the year.

Use our retirement savings calculator to estimate how much to invest or to see if you’re investing enough to fund your retirement.

Withdrawal Penalties on IRAs

When deciding to invest in an IRA, you are making a positive decision for your future. A bonus of having an IRA is you won’t be as tempted to withdraw funds early due to early withdrawal penalties.  

Withdrawal penalties on IRA accounts vary depending on the investment corporation where the IRA is being held. Early interest withdrawal fees and recurrence fees are some examples of penalties associated with IRAs.

There are exceptions with penalties once you reach the age of 59½, such as avoiding the 10% withdrawal fee on any amount deducted from their IRA.

Are IRA Contributions Tax Deductible?

IRA contribution deductions are dependent on multiple factors when it comes to your tax return.

Whether you can deduct your IRA contributions depends upon the type of IRA you are enrolled in, your election in an employer-sponsored retirement plan and your income.

Traditional IRA claimable deductions depend on if you’re covered by a retirement plan at work and if your income exceeds certain levels. Your deductions could also be limited by the factor of you or your spouse (if you’re married) being covered by a retirement plan at work. If you do not have a retirement plan at work, then your deduction is claimable in full.

Investing in an IRA is a great way to begin your retirement savings as a Millennial or truly at any age!

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