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Adulting + Retirement Funds

FYI on Retirement Funds

I know that we’re young and retirement is like 40 years away. But we really need to start thinking about it now, so when we live longer, we’re able to have a kick a$$ time. So be ready for some heavy finance talk about retirement funds.  Here is what you need to know.

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401k: This is what is called a defined contribution plan, which means that there is a defined contribution from you and your employer. So if you put in 3% of your income, your employer would match that at 3% as well. This is before tax, which is more beneficial to you. Why is it more beneficial? You have a larger sum of money before tax is taken out, which means the 3% is bigger. This is also a tax advantaged plan because it comes with a tax benefit which is that you match 3% of your pre-tax. You are able to grow your account even faster. Most of the time you cannot withdraw any money until you 59.5 years old without penalty, which include being taxed and owing at last a 10% penalty on the amount in your account. So don’t put any money in there you want to take out before your 60!

 

Traditional IRA: This is a private account that isn’t connected with your employer. You lose employer contributions, but you have independence and flexibility. It is very similar to a 401k however. You are able to contribute a certain amount of pre-tax income into the account, which is then used to invest into a pool of assets.This account is typically held by banks, financial institutions or brokerages and is invested into a variety of assets. Your contributions are tax-deductible as well.  Just like the 401k, you have to 59.5 years old to take the money out or your pay the same consequences as a 401k.There are exceptions to this however, you are able to withdraw is you are disabled, or if you die (your estate would withdraw, not you), to pay for a downpayment on your first house for you or a family member (who can’t pay you back), out of pocket medical expenses, health insurance, higher education costs, or annuity payments.  You do however, have to withdraw by the time you’re 70.5 or you face penalties. You also face limitations based on your income with how much you can contribute.

 

Roth IRA: This is very similar to a traditional IRA, so go ahead and re-read that right now. This big difference is that this is taken after-tax. So you have less money to deal with now. If your tax rate is lower when you start than when you retire, this is beneficial because you will pay less in taxes when you withdraw than you would with a traditional IRA. Why? Because you don’t have to pay taxes when you withdraw. There are other differences, like fewer restrictions on withdrawals, and earnings are not subject to tax. But this is only if 5 years has passed after distribution, and you are at least 59.5 years old. *The same exceptions apply for the Roth IRA that do for a traditional IRA.

 

Simple IRA: This is a savings incentive match plan for employees, typically used for small-businesses and self-employed. It’s basically a traditional IRA for small businesses and the self-employed. Your contributions are tax deductible, and your investments grow tax deferred  until you start to withdraw. Which is once again, when you’re 59.5 years old. Employees and employers can make contributions. They also have higher contributions, and the employer is required to make a contribution on the employee’s behalf. It’s also cheaper and easier to set-up.

 

Congrats! You made it through! Seriously thanks for reading, you have no idea how great this will be for you!

It’s really really important to note that I am not a finance person, rather someone who just decided that you should know what’s going on with your retirement. As you look at job offers and weigh your options, at least you know what they’re saying. I’m not saying that you make the decision on your own. Personally I think it’s worth the extra cost of talking to a financial advisor as well as an accountant. (My mom is an accountant, so I guess I’m a little biased).

Also, please don’t let anyone take advantage of you because they think they know more than you. You’re smart, and you’re perfectly capable of handling your own resources. Do your own research and find people that will respect you. Just because you’re a female, a millennial or a recent grad in a non-business or math major doesn’t mean you can’t understand your finances.

 

Anymore questions? Let me know! I promise to help answer, and if I can’t answer, I will find someone who will!

xoxo

Ashley

Sources: http://www.wisestockbuyer.com/2012/07/saving-for-retirement/ 

http://money.cnn.com/retirement/guide/IRA_SIMPLE.moneymag/

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  • Saving is SO important. Right now, my husband and I both have a traditional IRA & a 401k. I know people normally recommend Roth IRA’s instead of traditional since it is not taxed when you take it out, BUT at the same time, you’ll be in a lower tax class when you do take it out after you retire, so I guess it just depends on when you want to pay the taxes! 🙂 (FYI – I’m totally not educated on taxes AT ALL. My husband who is an accountant tried to explain all of this mumbo jumbo to me & I’m just typing what I think I remember haha) 😉

  • Love the insight of all of these things that I need to learn about!
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  • I have a 401k but I’d love to get an IRA fund going too!

    xoxo, Jenny

  • This is such great information! Thanks for sharing!

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  • Amy

    THANK YOU. I needed this. I feel so embarrassed that I don’t already know all of these things, but now I do! Thanks!
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  • I think it’s so smart to save early. I felt lucky to receive financial advice so early in my career and will forever be thankful for it!

  • I haven’t thought about any of this and it makes me really nervous. I keep putting it off but I need to really get my life together!
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    Lauren

  • Elana

    This is so helpful! I have a 401K but need to get better at thinking about retirement funds!

  • I’ve never thought about this before, so your post was a great place to start!

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  • Thank you SO much for explaining all of these because, although I’m pretty embossed to admit it, I wasn’t quite clear on what the differences were. This is super helpful.

    LiveLifeWell,
    Allison

  • oh my goodness! Adulting sounds hard!!! I’ll be all on my own in 2 years and its so scary to think about

  • This is such an awesome post! My boyfriend worked in finance for awhile, so I’m super thankful he helped me to get all of my stuff set up. I highly recommend anyone and everyone see a financial planner, because some of them even offer free budgeting help!

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  • Great post! Something that I need to get on top of. I am still a super poor student but hope once I graduate I can get this adult thing right.

  • Great job starting now! About a decade ago (gosh, I’m old), I got a 401k through my employer who did profit sharing contributions. So, if he had a good year, I got a percentage of his profit. This was AMAZING! Any employer who does this should be applauded. He closed up shop several months ago, so I had to roll it into an IRA. I’m definitely missing those profit contributions!

  • I haven’t thought about any of this, but I probably should sometime soon! Adulting sucks!

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  • LOVE LOVE LOVE! Sometimes, I try and talk to others my age about these things and people look at me like I’m crazy. In high school I had an amazing teacher who went over how you could be a millionaire by the time you retire if you add just a small percentage from the time you’re 18 to a Roth IRA and it really stuck with me! I have both a Roth IRA and my 401K already started and I know it’s going to help in the long run!

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