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Retirement for Beginners

Discussions about retirement can be bo-ring.  I’d like to start this one with some excitement.  Here’s a picture of a F-15E to get you pumped. 


F15


Wow.  That was exciting.  Now let’s talk retirement.


I’m no expert when it comes to investing.  I repeat, I’m no expert when it comes to investing.  But, I have gone through the confusion of figuring out where to start.  So, here are a few facts that have helped me make some educated decisions and sound less like a doofus when I talk about personal finance.


What is an IRA?  It’s an Individual Retirement Account.  That’s it.  Not scary or complicated at all; the title that is, the account itself can get pretty complicated. 


Traditional IRA Basics (and I mean basics)

  • These accounts are tax-deferred, which simply means that you don’t pay taxes on the money that you put in, you pay taxes on the money you take out when you retire.  You might have noticed on your tax return that there is a line for your Traditional IRA contributions; this is where the government returns the taxes you have already paid on the contributions you made to your IRA.


    Say you contribute $10 to your Traditional IRA this year, and when you retire that $10 has grown to $1,000.  With a Traditional IRA you will pay more taxes because you will pay them on $1,000 rather than $10.  This is a major difference between Traditional and Roth IRA’s.   

  • People under 50 can contribute up to $5,000 to their Traditional IRA & people between 50 and 70½ can contribute up to $6,000.

  • A contribution can be made in many different forms including, but not limited to: CDs, stocks, bonds, and mutual funds.

Roth IRA Basics

  • It’s called a “Roth” IRA because that’s the name of the chief sponsor of the legislation that created it, Senator William Roth.  How appropriate.  

  • A Roth IRA’s contributions are after-tax, meaning that when you contribute to a Roth IRA you have already paid taxes on that money; most likely through your payroll.  There is no place on your tax return for Roth IRA contributions because the government does not give these taxes back. 


    If you contribute $10 to your Roth IRA, no matter how much that $10 grows, no further taxes will be due (penalty may be due if you withdraw certain funds early).  Kind of a big deal.

  • You may have heard more about Roth’s this year because the option is available to convert from a Traditional to a Roth IRA.  Read this article at ChristianPF for a little enlightenment on this issue.

  • You can withdraw your contributions (only the amount you put in, not your earnings) early tax free and penalty free because you’ve already paid taxes on them. 

  • Like with Traditional IRA’s, people under 50 can contribute up to $5,000 to their Roth IRA & people between 50 and 70½ can contribute up to $6,000.

  • Again, like Traditional IRA’s, contribution can be made in many different forms including, but not limited to: CDs, stocks, bonds, and mutual funds.

401what?  401k!  (Military folks, this is your Thrift Savings Plan)

  • A 401k is just another retirement savings plan.  They are often run by employers as a little perk for employees.

  • Why is it called a 401k?  Because that’s the section of the Internal Revenue Code where the plan comes from.  Yes, I think it’s a lame name too; they could have named it something way more awesome.

  • A 401k is similar to a Traditional IRA, in that the earnings are tax-deferred.

  • You’re employer may offer a “matching program”; meaning that they will match your contributions to your 401k up to a percentage (3% is about average) of your wages.  When you participate in a matching program the money is automatically deducted from your paycheck; you don’t have to do any work or deal with any temptation that would result in you not saving. 


    Assume your employer offers a 3% 401k matching program.  If you make $30,000/year and you contribute $900 (3% of your salary) to your 401k, your employer will contribute $900.  Your return on your investment is automatically 100%, you will have at least $1,800 in your retirement savings, and you will be one smart cookie.

These are just a few options available when it comes to saving for retirement and clearly you should talk with an advisor to figure out what’s best for you.  I recommend Free Money Finance’s Three Steps to Choosing a Financial Adviser for some good advice.


I also love poking around USAA and Edward Jones; check them out for more specifics and an all around good time.


 


Photo Credit: Lance Cheung

     


    Share what you’ve learned about starting to save for retirement. 


    Or keep it to yourself, that’s not greedy at all.

     


Article publié pour la première fois le 25/06/2010

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