When it comes to retirement planning, it’s never too early to start. One thing to remember about investing is that the choices you make today will compound tomorrow. So waiting a year might not seem like a big deal, but that year could have a big overall impact on final retirement savings.
As millennials reach their mid and late thirties, things suddenly get very real. Many will buy houses, get married, have children, etc. Many young people realize that they may have been dealt a bad hand when it comes to financial education—i.e. they had none. Public schools don’t take time to teach people how to save or make wise financial decisions, and some young people suddenly find themselves unsure of how to secure their financial futures.
So how do we remedy this? We say start with sound financial advising, commitment, and proper education.
Let’s Start With Individual Retirement Accounts — IRAs and Roth IRAs
There’s so much retirement and financial information out there that it can easily get overwhelming. So let’s start with the basics of retirement planning and investing. For many folks, this comes in the form of individual retirement accounts. These types of accounts offer different investment options and align with a person’s expected income, current income, and future goals.
The two main types of individual retirement accounts (IRA) include Roth IRA and Traditional IRA. Let’s take a look at each, below.
Known as “the Roth,” this IRA can be best suited for people who think they will be in a higher tax bracket upon retirement. The main difference is perhaps the fact that this type of retirement account allows for after-tax contributions. This means that as the money goes in, it is already taxed and therefore withdrawals are not subject to tax.
- Penalties: Withdrawals are penalty and tax-free after five years and after age 59 ½. If an individual makes early withdrawals on this, there might be taxes and penalties that apply.
- Benefits: Once you retire, there are no tax penalties. You can lock in the tax rate instead of leaving it up to fate. After all, who knows what taxes will be like in 30 to 40 years.
This account may be well-suited for individuals operating in a higher tax bracket and foresee being in a lower tax bracket upon retirement. In contrast to the Roth, the traditional IRA is known as tax-deferred. The tax implications are much more immediate and contributions are often tax-deductible.
- Penalties: You pay no taxes until you withdraw the money. At age 72, you must start taking the mandated required minimum distributions and they are taxed as ordinary income. If you withdraw the money before age 59 1/2, you might have to pay a 10% early-withdrawal penalty, federal tax, and possibly even state tax.
- Benefits: With this option, you’re giving yourself a bit of a break today and choosing to pay taxes later. This can benefit you if you are in a lower tax bracket and can’t afford to make big contributions but still want to start your retirement savings.
Which IRA is Right For You?
Like all things financial planning, the short answer is: it depends. Not only does it depend on your current income, career plans, educational goals, or family goals, but it also depends on how you envision your future and possibly other assets.
The best approach is to understand your options, lay out the possibilities, and run some numbers. This isn’t always easy without the guidance of a financial expert that understands the varying factors and externalities that come into play.
Converting Your Traditional IRA into a Roth
Yes, this is an option down the line. So many young people wonder whether they can convert their traditional IRA into a Roth a few years in. The great thing about starting your retirement savings early is it gives you options to adjust, readjust, and strategize.
Perhaps you need the tax breaks today because you’re still finishing grad school or relatively new in your career. As you earn more money and become more financially independent, you can consider the switch to a Roth IRA, but the answer is not always clear-cut. There are tax implications to making this switch and it is not reversible.
Anyone can convert their eligible IRA assets to a Roth IRA, but the choice is still something you want to verify with your financial advisor.
Don’t Get Caught In the Past, Invest in Your Future Now!
Wallowing about past financial decisions or lack thereof will not turn back time. If you’re in your 30s, now is a fantastic time to start planning. Here, at Integra Capital, we get to work as soon as you pick up the phone and dial our office. We assess the options and analyze potential. We find out what’s important to you and how you envision your future.
Ready to get started? Integra Capital is all about building your future using available tools. Our focus is on client education and knowledge, to empower people to understand their financial decisions and shape the future they want to live in.
Want to learn more about financial decisions? Contact Integra Capital today and start securing your future.