401(k) plans make it easy to set aside money for your retirement, but as we said in our last post, fewer than half of Americans have the option to contribute to a 401(k) plan through their workplace (let alone one that matches contributions). You’re even less likely to have a 401(k) option if you’re working for a small business, which includes not only many people working in the service industry, but also at tech start-ups and new business ventures.
How are young people without 401(k) plans supposed to save for retirement? It takes a little more conscious thought than just having your employer withdraw a sum from your paycheck before you ever even see it, but it’s actually still pretty easy!
Fund an IRA
What’s an IRA? If you’re like many people under 30, you probably have only the vaguest idea. IRA stands for Individual Retirement Account, and there are two main kinds: traditional and Roth. A Roth IRA is “better” in the sense that contributions to Roth IRAs are taxed at the time of deposit, and you can withdraw the deposit and the money it’s earned in interest tax-free later. With a Traditional IRA, you pay taxes on withdrawal, meaning you’re taxed for both the original deposit and the interest it’s earned.
So why would anyone choose a Traditional IRA? Well, because there’s an income cap on the Roth—only married people earning less than $181,000 a year or single people earning less than $114,000 can make the maximum yearly contribution, and that contribution is set at $5,500. So if you’re making over $114,000 a year or if you’d like to deposit more than $5,500 a year into an IRA, you’ll want to open a Traditional IRA.
Make Your Tax Bracket Work For You
Does $114,000 sound like an outrageous amount of money for someone under 30 to be making? If so, then you’re not only an average millennial (in 2013 the average salary for males age 16 to 34 was $35,000, and for women it was $30,000) but you’re also probably in a low tax bracket, meaning that the money in your Roth IRA will be taxed according to your current salary, rather than the salary you make when you eventually retire, which will (hopefully) be considerably higher. So saving money in a Roth IRA is like an instant tax break!
How to Open an IRA
There are a number of different ways you can open your first IRA, including with brokers, banks, mutual fund companies, or even online services. In our next post, we’ll go over the steps for how to open your first IRA! It’s really not as intimidating as you think, we promise!