Millennials are showing they are better at budgeting than the average American, according to a study by Earnest, Amino and Earnest. However, it did show they have a weak spot when it comes to finances — retirement savings.
The study found that 71 percent of Millennials use a budgeting tool or keep a monthly budget compared to 41 percent of the remaining population. Also, 68 percent of Millennials could handle a $500 emergency without going into debt, while only 43% of other Americans can say the same.
However, the study reported that only 31 percent of Millennials have begun saving for retirement.
So, how exactly should you begin saving for retirement?
How to Start Investing for Retirement
A step toward a good retirement savings plan starts with educating yourself on investment opportunities.
One option to look at is 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’s important to 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. Meanwhile, anyone can open a Roth IRA at any age, but they may have income stipulations. Simple IRA guidelines are determined by your employer and may be dependent upon years of service or age.
Consider talking to a financial advisor when evaluating your options. He or she can help outline the pros and cons of different types of IRAs, so you can choose the best retirement savings path for you.
Traditional vs. Simple IRA vs. Roth
You set up a Traditional IRA as a sole contributor, and add your pre-tax income. 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 current contribution limits are $6,000 per year 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 other qualifying payments.
To make sure your contributions will help you reach your retirement savings goal, map out a plan to see exactly how much you need to save.
Withdrawal Penalties on IRAs
When you decide to invest in an IRA, you’re 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, but generally, fees are there to help reduce the temptation to withdraw funds. It may help to simply think of your retirement account as off-limits until retirement – no ifs, ands, or buts.
Are IRA Contributions Tax-Deductible?
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.
Get Started Today
Investing in an IRA is a great way to begin your retirement savings at any age. And the most important part of saving for retirement? Starting early so you have time on your side.
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