How And Why Young People Should Start A Retirement Savings Account

Elarra

How And Why Young People Should Start A Retirement Savings Account

So I’ve been thinking about what my next Take should be. I didn’t want to necessarily do a traditional list Take, but, at the same time, I Wanted to write about something important that most people would read. That means this is a list Take. Again.

But whatever. On to the Take itself.

I was talking to my mother today about ways to save money after I heard about the plan to cut social security over the next 30 or so years. Now, I don’t pay into social security. I am a teacher and, therefore, the cut doesn’t necessarily impact me. But just because it doesn’t impact me yet doesn’t mean I won’t get a different job that will pay into social security and, therefore, I may be getting a social security check. You nor I can predict what we will be doing in the future. Therefore, I want a back up plan.

Back to my mother. My mom has been an accountant for over 30 years. In this time frame, she has worked in various businesses from housing authorities to business administration and human resources. She hasn’t really had a hard time getting a job, either, considering she knows what she’s doing and has on several occasions saved some businesses from bankruptcy. So this advice actually comes from her. Well, it’s really advice she gave me three years ago, but I believe most of it is still applicable today.

So…how exactly do I save myself from having to rely on a retirement system that may screw me over in the future? Easy.

Start a 403b plan

How And Why Young People Should Start A Retirement Savings Account

Well, a 403b plan is only for certain occupations, which I’ll list below in moment. The short version is this: When starting a 403b plan you are essentially telling your employer to put a certain amount of money into an account (which, in most cases, you cannot touch) that will be later used in addition to the retirement system you are currently paying into. For me, as a teacher, that retirement system is STRS, the state teacher retirement system.

The best part of this plan is that you get to choose how much you put into this account. For me, I put $60 of each paycheck into this system. This system is only offered to tax-exempt employees like teachers, hospitals, and religious groups. This means teachers, nurses, and even preachers can start this system.

I work at a for-profit organization, so I can’t have a 403b plan.

How And Why Young People Should Start A Retirement Savings Account

That’s why you can get a 401k. It’s essentially the same thing as a 403b plan except with a 401k, you can’t withdraw anything from until you’ve worked for the employer for a certain amount of time to ensure you don’t start working and then quit immediately. There’s also several penalties for withdrawing from a 401k plan that tend to be more severe and costly, making withdrawing from a 401k much more complicated and costly that it’s 403b counterpart. Think about it. A 403b is usually one person contributing. A 401k is typically two people contributing. That means that even if it’s the same percentage penalty coming out, 401k plan holder will be paying more than a 403b plan holder.

One benefit a 401k plan has over a 403b is that for a 403b, the employer doesn’t usually to match your contribution. It would make sense as they are not for-profit organizations and rely on state funds for most of their activities. That would mean, in essence, the state is adding money into a 403b account. For instance, that would mean for schools that there would be less funds for students and school materials and books. The money that would pay for that would be going into a teacher’s retirement account. States only give non-profit organizations a certain amount of money per year, and if the till is empty, then it’s the organizations fault.

A for-profit organization typically gets no state funds, so it would be coming directly out of the employers account up to 6%. That doesn’t mean they’re obligated to put money into an employee’s account, but most of the time, they do.

Are those the only retirement plans I can have?

How And Why Young People Should Start A Retirement Savings Account

No, not at all. There’s another option called a Roth IRA. Basically, a Roth IRA is taxed as you put money into the account until you begin withdrawing it. When it’s being withdrawn, it’s tax free. 403b and 401k plans have payments come out BEFORE taxes and the checks are taxed later when you are retired.

Also, a Roth IRA is something that you personally control and start. Same with an IRA. A 401k and 403b is only offered through the employer. That means that if you switch employers, you could have several 401k accounts. I believe you can roll them all into one, but I’d have to double check that with my mother.

A downfall of a Roth IRA is that it’s highly unlikely that an employer would put any money into it as it’s usually not tied to the employer. But, unlike other plans, you can withdraw money from a Roth IRA tax free so long as it matches your contribution, which is dictated by you.

Now, there is also something called a Traditional IRA. That’s actually the same thing as a Roth IRA with one exception. So long as you follow all the rules of a Roth IRA, you may not pay any taxes at all, even on your contributions and after you begin withdrawing during your retirement. Very few people follow all the rules, though. A traditional IRA is taxed during contributions and withdrawing, but not as it is accruing within the account. Also, the taxes after retirement are taxed at a regular rate. You can also have a Traditional and Roth IRA as well as 401k or 403b plan through your employer, though different tax deduction through the IRAs may be impacted. However, you can still contribute whatever you want.

The age that you can withdraw from some of these accounts is 59 ½ without penalty. Before that, you would probably penalized.

How And Why Young People Should Start A Retirement Savings Account

So here are the basics of IRAs:

Traditional IRAs are a good idea if you think you’ll be in a lower tax bracket during retirement, your income exceeds the amount for the Roth IRA, or you want tax deductions now instead of later.

Roth IRAs are better if you want to withdraw tax free during retirement or think you’ll be in the same or higher tax bracket.

If you qualify for both a Roth and Traditional, they you should probably go with the Traditional IRA.


Okay, so, when do I start contributing?

How And Why Young People Should Start A Retirement Savings Account

Immediately. Or, if you’re currently in college or have a minimum wage job as a teenager, you should probably start some type of IRA account in your mid to late twenties. Remember you still have to be able to live off of your income, so it would be wise to save some money first in your own checking or savings account before you take sums out. But if you ever see a job offering a 401k or 403b plan, jump on it. As soon as possible.


So this is just the start of retirement plans. There’s a lot more to it than what I’ve listed, but I didn’t want to overwhelm anyone. However, a simple search will tell you of penalties and requirements to have any of these retirement accounts.

But the last piece of advice my mom offered me is this. No matter what job you have or plan you get through your employer, get a back-up plan because usually the back-up plan yields more money and has a better pay off during retirement. That, and it's always a good idea to be 100% in control of your own money.

Also, just to reinforce her validity, there's also this. My father has $1.2 million in stock market retirement funds that he shouldn't touch until he's 65. My mom has 401k plans as does my dad, and both have Roth IRA accounts, on top of their social security checks they'll be receiving in the coming years. When my hits the age of 62 in about two years (because she's impatient and doesn't want to wait until 65), my parents will have $6,000 a month coming their way with the social security checks, Roths, and 401k plans. When my dad hits 65 in about 3 years, it'll increase to $10,000 a month because of his stock market retirement account.

So, trust me, you want to start saving for your retirement now.

**Note: I will be re-checking this Take with my mom when she returns from a trip she took this weekend. This advice is from what I can remember that she told me combined with my own research.

How And Why Young People Should Start A Retirement Savings Account

How And Why Young People Should Start A Retirement Savings Account
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