If you ask any financial advisor when to start saving for retirement, their answer would be simple: Now. Investing for retirement is like a good wine—both have the potential to drastically improve with age.
It’s certainly not easy to prioritize investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as saving for a down payment on a house or kid’s college.
But setting aside a little every year starting in your 20s could make the difference between hundreds of thousands of dollars of accumulated investment earnings by retirement age. That’s one reason it’s important to begin planning for retirement early.
Another reason is because retirement may be the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.
It might help to understand that retirement is not an age—it’s an amount of money saved. When you’ll retire is directly related to how much money you’ve socked away.
While your parents or grandparents may have had a pension plan that kicked off at 65 on the nose, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement requires that employees do their own saving.
To see where you stand with your retirement savings (and where you are heading) you could use a simple retirement savings calculator. This will help give you a little perspective on how to get started on your retirement savings strategy.
The Different Ways to Save for Retirement
First, you might want to determine where you should be saving your money. Here are the most common types of retirement accounts and who can use them.
401(k) or Other Workplace Plan
A 401(k) is a workplace retirement account offered by employers. Typically, you contribute a portion of your paycheck, pre-tax. One of the benefits of using your workplace’s retirement plan is that your company may offer a “match.”
A match is when your company contributes to your account when you do. The current average employer match is 4.7% , according to Fidelity.
At the very least, you might want to contribute to take advantage of your match since it’s essentially free money. You don’t have to stop there, though—you can contribute up to $19,000 per year into a 401(k) account.
These accounts are tax-deferred, meaning you pay income taxes when withdrawing the savings in retirement. One of the many benefits of using a 401(k) or similar workplace plan is that it lowers your taxable income.
For instance, if you’re making $85,000 and you’re contributing $10,000 annually to your 401(k), then you’ll only be taxed on $75,000 of that income.
One of the downsides to a 401(k) is that withdrawing these funds early could trigger a 10% tax penalty in addition to income taxes.
An IRA, which stands for Individual Retirement Account, is another account you may use to save for retirement. Like a 401(k), a traditional IRA is tax-deferred and provides a place for your investments to grow free from capital gains tax.
Again, tax-deferred means that the money is taxed upon withdrawal at retirement. Therefore, a traditional IRA also carries a penalty for early withdrawal.
An IRA is an investment account that is not tied to your workplace. That makes a traditional IRA an option for those that are self-employed or freelancers.
Unfortunately, traditional IRA accounts have a much lower contribution limit: $6,000 in 2019 if you’re younger than 50. Those 50 and older can contribute $7,000 annually.
A Roth IRA is both similar and different from a traditional IRA. Like a traditional IRA, a Roth IRA is an account that you would open on your own, separate from your workplace. It’s also possible to contribute up to $6,000 into a Roth IRA each year.
Unlike a Traditional IRA and a 401(k), which are tax-deferred, a Roth IRA has its own unique taxation.
With a Roth IRA, you pay income taxes on the money that is contributed to the account, but not when you withdrawal the money, in retirement. Like all retirement accounts, Roth IRAs also provide tax-free investment growth.
Because you’ve already paid income taxes on contributions to a Roth IRA, those contributions can be withdrawn without penalty.
Both those covered by workplace retirement plans and those who are self-employed can contribute to a Roth IRA, although not everyone qualifies. And there are income limitations to using a Roth IRA (you can’t earn too much and use one).
This is not a comprehensive list of retirement accounts. When making a decision about which retirement account you could use, it might be a good idea to discuss this decision with a tax professional.
What Is a Wealth Account?
Like a 401(k) or an IRA, a wealth account is also an investment vehicle. But unlike an account designed specifically for retirement, these accounts do not have the same tax benefits.
You might consider using a wealth account if you want to invest for a goal other than retirement, or you’ve “maxed out” (contributed the maximum allowable amount to) your retirement accounts.
Because a wealth account does not have the tax benefits of a 401(k) or IRA, it also doesn’t come with the same early withdrawal penalties. Wealth accounts are often called “after-tax accounts” because you contribute and invest money you’ve already paid income taxes on—and you pay taxes on the capital gains when you withdraw your cash. Unlike a retirement account, you will also pay capital gains tax.
Whether you’re opening a retirement account or a wealth account, you might want to check what types of fees the account will charge. Just like checking and savings accounts at banks you’re familiar with, these accounts can have maintenance fees. With SoFi Invest, you don’t pay a fee to open an account, and there’s no minimum to get started.
Investing for Retirement
Once money has been contributed to a retirement account, it’s time to invest that money. To say “saving for retirement” is a bit misleading—really, it can be considered to be “investing for retirement.” And you can invest within any of the above-mentioned accounts.
If you have a workplace plan, you may be given a list of mutual funds to choose from. To choose a fund, you might want to determine whether the underlying investment (usually stocks or bonds) are appropriate given your goals and risk tolerance. You may also want to consider the fees of the fund, called the expense ratio.
For those without a workplace plan, you might want to open a retirement account, fund the account with cash, and then invest the money.
Because you will be doing so at a brokerage firm or online trading platform, you might have more investing options than you would with a workplace retirement plan.
Taking the First Step to Retirement
The first step is to open an account or use the one that’s already open. You could start or increase your contribution. If you’re opening an account, you may want to consider one without fees, which cut directly into your bottom line.
SoFi Invest® offers retirement and wealth accounts that you can open and fund for free with a $0 minimum.
Next, you could decide how you’d like to invest the money within the account. If you are comfortable picking out your own stocks and funds, SoFi Active Investing may just be the service for you. With SoFi Active Invest, you pay no fees to place trades.
You could consider SoFi Automated Investing if you’d like a bit more help getting started. With this service, SoFi will consider your goals, investing timeline, and risk tolerance to build you a diversified, low-cost portfolio. Best of all, this additional service costs you nothing.
Investing in retirement and wealth accounts could be a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.
Ready to start investing for retirement? A SoFi Invest account gets you no-fee investing options and complimentary access to our wealth advisors.
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