Choosing a retirement plan

OK lets face it, no one wants to think about retirement early on in their career. After all, many of you reading are 20-somethings who just started out your career - 65 seems like a lifetime away! But saving early will make you massive money later in life due to compound interest. And don't forget the MASSIVE tax breaks. If you're like me, you pay your taxes because you have to but you don't want to pay any more than you have to!

401(k)

This is your typical employer sponsored plan. Generally, you'll have the option to automatically deposit a percentage of your paycheck into a 401(k), reducing your taxable income for that pay period. There are some contribution limits but I generally recommend investing around 10% of your paycheck if possible. Some employers will match a percentage of your contributions (see more on that below).

Bonus: Many employers now offer Roth 401(k) plans in addition to traditional. For young investors I highly recommend choosing Roth - which I'll discuss more in depth in another post.

IRA

An IRA is a government sponsored, tax-deferred personal retirement plan. You can contribute to these without an employer, up to a maximum of $5500 a year (in 2018). IRAs can also be either Roth or Traditional, see the next section.

Roth vs. Traditional

This is the biggest choice most people have to make when they set up a retirement account - let me break it down for you. Roth essentially means you pay NOW on the money you invest, whereas traditional you pay tax LATER. So let's say you make $1000 a month and you put 10% of your paycheck into a 401(k). With a traditional 401(k), you're reducing your taxable income by $100 - thus only owing tax on the remaining money. With a Roth plan you pay tax on the full $1000, but when you withdraw from the account after 65 you pay NOTHING. The best advice I have for making the decision is to determine whether you think your tax bracket will be higher when you start taking withdrawals.

Most people will be making significantly higher income when they are 65 versus 25, so I recommend investing in Roth accounts as much as possible. Additionally, your retirement funds will grow over time if you invest them (i.e. index funds or individual stocks). Assuming your tax rate stays fixed at 20%, imagine you contributed $100 today, but by the time you retire it grew to $10,000. Now you owe $2,000 when you withdraw instead of $20 when you first made the contribution.

Employer Match Programs (AKA Free 💸💸💸)

Many employers have 401(k) "match" programs where the company will deposit money into your 401(k) as a percentage of the contributions you make (up to a certain amount). For example, if your employer has a 50% match policy up to 6% and you contribute 6% of your paycheck, they will match 3% for free and you'll get 9% in your account. I cannot emphasize enough that you should TAKE ADVANTAGE OF THIS. It's literally free money and will add up to a lot over time.

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Personal Finance blog by Matt Gabor
Consumable knowledge bytes to chomp on your path to wealth. All posts are under 500(-ish) words. Trying to help at least one millennial become more financially literate.