Paying for Our Golden Years: IRAs, Retirement & 401(k) plans

Posted on Dec 19th, 2016 | Investing, Savings

Sure, we’re young and awesome now, but one day we’ll trade in our mountain bikes for replacement hips. The great news? Think beaches and hosting sandcastle tournaments every day. There’s just one thing standing in our way: money.

It takes a lot of dough to retire comfortably, and the sooner we get started, the more our money can grow. It’s a concept known as compounding, and it means that for every year we have money in a retirement account, not only will our principal earn interest, but we’ll also earn interest on whatever interest we’ve made. Free money? Yep.

Two common options for retirement savings are Individual Retirement Plans (IRAs) and 401(k) plans.

IRAs

They’re simple and convenient. Plus you can choose from one of multiple plans, including a traditional plan or a Roth IRA.

IRAs are basically savings accounts earmarked for retirement. Unlike 401(k) plans, which are employer-sponsored, your IRA is all on you. You can open one at a local financial institution, brokerage firm, mutual fund company or investment firms and contribute up to $5,500 each year. (The IRS limits contributions because of the potential tax benefits involved.) With an IRA, you have the option of adding to your account monthly or dumping a lump sum by your tax return filing deadline. You can withdraw anything to score a sweet return.

Traditional IRA

With a traditional IRA, the money you put in is tax deductible as long as you meet certain criteria. If you qualify, you’ll reduce your tax burden initially, but you’ll pay taxes on the money you withdraw during retirement. Once you hit age 59 1/2 — yikes — you can withdraw that money and use it to fund a rocking retirement. Tap into those funds early, however, and you’ll get smacked with a 10 percent penalty on your withdraw.

Roth IRA

With a Roth IRA, you’ll pay taxes up from on whatever amount you put in just as you’d pay taxes on ordinary income. But when the time comes to make a withdrawal, those distributions will be tax free. With there are no income limits for a traditional IRA, with a Roth, you’re only eligible if you make under a certain amount of income. You can withdraw funds from your Roth IRA without penalty starting at age 59 1/2 — same as a traditional IRA. And if you withdraw before you reach that age, you’ll incur that nasty 10 percent penalty.

401(k) Plans

They’re unassuming, they look great on paper and they’re even available with company matching programs.

A 401(k) is an employer-sponsored retirement savings plan. With a 401(k), you can allocate pretax dollars to your retirement savings and avoid paying taxes on your earnings up front. You will, however, pay taxes when the time comes to withdraw that money. They pretax contribution limit set by the IRS in 2015 was $18,000, and you can participate in your company’s plan regardless of how much you earn.

Your contributions will be deducted from each paycheck based on the amount you elect to put in, and once you’ve got some money to play with, you can start making it grow.

As is the case with an IRA, you can access your 401(k) money at age 59 1/2. Dig in beforehand and you’ll get slapped with that dreaded 10 percent fine.

If your employer offer a 401(k) match, it means there’s free money coming your way as long as you contribute a portion of your paycheck. In this regard, 401(k) plans have a slight edge over IRAs. No matter which type of plan you choose, the key is to start early — as early as your first paycheck! If we invest wisely and earn a decent return, we might have enough dough saved to fund that easy, breezy beach retirement — dentures and all.

Retirement by the Average Numbers
  • 62: Retirement age in the U.S.
  • $103,000: Total amount saved for retirement by American ages 55-64.
  • 8 times your ending salary: The amount that’s needed to retire comfortably.
  • 36 percent: The percent of American adults who aren’t saving for retirement.
  • $42,700: Total amount saved for retirement by Americans ages 35-44.
  • $1,306: Estimated monthly Social Security benefits for 2015 recipients.
  • $40,938: Yearly expenses of retired U.S. households.
Your Dream Job

Research the benefits offered by a company you’d like to work for in the future. Does the company offer any savings plans for retirement? If they don’t offer a retirement plan, what can you do to start savings for retirement?