Retirement Savings for Young Adults

iStock_000009163885XSmallThe importance of beginning your retirement planning savings as soon as you have your first job cannot be stressed enough. Over my next few blog posts, I will discuss 401(k) Plans, Roth IRAs, and Traditional IRAs – the tools you can use to achieve financial security in retirement.

As a brief introduction, let’s summarize the most common options and their features:

• If your employer offers a 401(k) Plan, sign up immediately. In a 401(k) Plan, the employee directs retirement savings contributions from his or her paycheck and sometimes the employer will even match these contributions. This is free money! The contributions are deducted from the employee’s paycheck before taxation (they are tax-deferred until withdrawn after retirement or as otherwise permitted by law), and are limited to a maximum pre-tax annual contribution of $17,500, as of 2014 for individuals under the age of fifty-five (55). Similar options are 403(b) Plans for nonprofit institutions, 457(b) plans for government employers, and Roth 401(k) plans. I will discuss these different kinds of retirement plans in my upcoming posts.

• In a Roth IRA, your money grows tax-free, you can invest in almost anything, and it is the most flexible retirement option of those listed here. Like a Traditional IRA, the contribution limit for 2013 and 2014 is $5,500 a year for individuals under the age of fifty-five (55).

• A Traditional IRA is another type of retirement account which you may be eligible for if you have sufficient income to make the contribution. The best benefit of a Traditional IRA is the tax-deductibility of contributions, which have strict eligibility requirements based on income, filing status, and availability of other retirement plans. Distributions from a Traditional IRA are treated as ordinary income and may be subject to income taxes in retirement.

If your employer does not offer a 401(k) plan, I encourage setting up a Roth IRA as a young adult. Contributions you make to the account grow entirely tax free. These funds can be invested in stocks, bonds, mutual funds, and even real estate. You can contribute up to $5,500 in 2014 so long as your income is below $114,000 if you are single, or $181,000 if you’re married filing a joint tax return. After those income caps, the contribution limit phases out in increments.

I recently saw an astounding figure at what you can save for retirement with a Roth IRA. Consider this calculation recently mentioned in Kiplinger Personal Finance: “If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. And the money is all hers — she won’t have to give the IRS a cent of it if she waits until retirement to withdraw the earnings.”

Other flexibility benefits of the Roth IRA include that you can withdraw contributions (not earnings) from the account, tax free and without penalty, after five-years, if you are in a pinch. You can even use the funds, subject to certain limits and rules, to buy your first home and to pay for a child’s college education.

Visit your neighborhood bank or a mutual fund company to open an IRA. You should be able to make contributions online or even have your contributions withdrawn regularly from your bank account to ensure you’re always saving. Add your tax refund to your IRA to get a good start on your IRA. Good luck and get started! It’s never too early.Duck


About Emily Beekman

Emily joined Mirick O’Connell in 2014 as an associate with the Trusts and Estates Group. The focus of her practice is estate planning, probate and trust administration, and elder law. Emily assists clients with the preparation of wills, revocable living trusts, health care proxies, durable powers of attorney, and MassHealth applications. She also concentrates her practice in the area of estate and trust administration, advising personal representatives, trustees and other fiduciaries on the legal aspects of administering complex estates and trusts. This representation also includes the preparation and filing of gift and estate tax returns on the state and federal levels.
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