Saving for retirement by making small regular investments in your twenties and thirties can help your savings grow tax-deferred over the span of 30 or 40 years. The earlier you open a retirement account, the better.
Employer-sponsored retirement plan vs IRA
Both 401(k)s and Individual Retirement Accounts (IRAs) have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401(k)s and IRAs is that employers offer 401(k)s, but individuals open IRAs using a bank or a broker. IRAs typically offer more investments, whereas 401(k)s allow higher annual contributions.
Which is right for me?
If your employer offers a 401(k) with a company match, consider putting enough money in your 401(k) to get the maximum match. Once you get the match, then consider maxing out an IRA for the year. Having both of these accounts will help create your nest-egg for retirement.
When to set up a 401(k)
When starting a new job, the company will probably ask you if you’d like to enroll in a 401(k). Enroll in your 401(k) as soon as possible to start saving for your future. Even if you’re considering a job switch, start funding your 401(k). Later, you can use a direct transfer method to transfer your entire account balance without taxes or penalties.
How much should I contribute to my retirement accounts?
401(k): In 2021, you can contribute up to $19,500 if you’re under 50 years of age. Employer contributions are added on top of that limit! Over 50? You can contribute up to $26,000 a year.
IRA: For individuals, the IRA contribution limit is $6,000 for 2020 and 2021. The limit applies to either traditional or Roth IRA. If your company provides 401(k) matching, you’ll want to deposit the majority of your funds there and any additional funds into your IRA account.
35 and no retirement? It's not too late!
It is never too late to start saving money you’ll use in retirement. Even starting at age 35 means you can have more than 30 years to save, and you can still greatly benefit from the compounding effects of investing in tax-sheltered retirement vehicles.
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