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5. Save for retirement by funding an IRA (includes 401ks and 403bs, etc.)

Pick a monthly amount that you feel comfortable with and put that money into an IRA. Start investing for your future.

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Reasons

 

Invest for retirement

  • IRAs, formally known as Individual Retirement Accounts, are investment vehicles that help people build wealth for retirement.

  • Simply speaking, you contribute a monthly amount into your account, it is invested, and it grows based on the appreciation from the investments' performance. Yes, they can also go down if the stocks depreciate.

  • Don't be scared of downturns in the market - the S&P 500 has returned 9.90% since its inception in 1928.

  • Life can be pretty hectic and expenses are always going to be there - it is important to set aside an amount for your future so you can live comfortably in retirement.

 

Tax Advantages

  • One might ask why they shouldn't invest directly into index funds and have more access/control over their capital. Good question.

  • IRAs provide key tax incentives that make them a favorable option.

  • There are two types of IRAS: Traditional and Roth

    • Traditional IRAs are contributions made before your income is taxed, which reduces your taxable income and therefore the amount of taxes you have to pay. When you receive distributions in retirement, the money you receive is taxed.

    • Roth IRAs are contributions made after your income is taxed, so you will pay more in taxes out of your paycheck. When you receive distributions in retirement, the money you receive is not taxed.

 

Tips

 

Differences between Traditional and Roth IRAs

  • Tax Treatment

    • Traditional IRAs are contributions made before your income is taxed, which reduces your taxable income and therefore the amount of taxes you have to pay. When you receive distributions in retirement, the money you receive is taxed.

    • Roth IRAs are contributions made after your income is taxed, so you will pay more in taxes out of your paycheck. When you receive distributions in retirement, the money you receive is not taxed.

  • Eligibility Requirements

    • Traditional IRAs do not have income limits.

    • Roth IRAs do have income limits -> Single Filers = $138,000 | Joint Filers = $218,000

      • For high-earners who are not eligible to contribute to a Roth IRA but want the tax benefits of a Roth, there is something called a backdoor Roth IRA.

        • A “backdoor” Roth IRA allows high earners to sidestep the Roth IRA’s income limits by converting nondeductible traditional IRA contributions to a Roth IRA.

        • That typically requires you to pay income taxes on funds being rolled into the Roth account that have not previously been taxed.

        • I would suggest speaking with a Financial Advisor or Tax Advisor if you need help in this area.

  • Withdrawals

    • Traditional IRAs

      • Withdrawals can be taken after age 59½ without penalty. Any withdrawals prior to 59½ are subject to a 10% fee, with some exceptions.

      • Required Minimum Distributions (RMDs) must start at age 73. 

    • Roth IRAs

      • Contributions can be withdrawn anytime without taxes or penalties. Earnings withdrawn before age 59½ may be subject to taxes and a 10% penalty, with some exceptions.

      • There are no Required Minimum Distributions (RMDs).

  • Contribution Limits

    • IRAs

      • Annual Contribution Limit: $7,000 (for 2024), with an additional $1,000 catch-up contribution allowed for those aged 50 and older.

      • Combined Limit: The contribution limit applies to the total contributions made to both types of IRAs. You can't contribute $7,000 to each; the total must not exceed the annual limit.

    • 401(k) and 403(b) Plans

      • Employee Annual Contribution Limit: $23,000 (for 2024), with an additional $7,500 catch-up contribution allowed for those aged 50 and older.

      • Total Contribution Limit: Including employer contributions, the total limit is $69,000. For employees aged 50 and older, this limit increases to $76,500.

    • What is the difference between an IRA and a 401(k) / 403(b)?

      • An IRA is an Individual Retirement Account that you set up on your own and managed by you entirely (or with the help of an advisor).

      • A 401(k) / 403(b) is a type of IRA that is only offered through an employer and is managed by the employer. These are eligible to receive employer contributions on top your own contributions.

  • Conversions

    • You can convert a Traditional IRA to a Roth IRA. This is known as a Roth conversion, and it involves paying taxes on the amount converted in the year of the conversion.

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Make retirement contributions a mandatory expense

  • We all have expenses that we need to account for - they are unavoidable and essential to our lifestyle. It is important to set aside a reasonable amount to contribute to an IRA.

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Create a budget

  • Yes, this is a recurring theme here.

  • A budget will inform you on how much you can contribute to an IRA on a monthly basis. It must be a comfortable number that is within your means.

 

Try to increase the monthly contribution amount as much as possible

  • Every time you receive an increase in salary, try to increase your monthly contribution percentage as well. If your salary increase 5%, try to increase your contribution by 1-2%.

 

Loans

  • Under certain qualified plans (401k), you are allowed to take a certain amount as a loan.

  • This amount is the greater of $10,000 or 50% of your vested account balance.

  • You cannot borrow from an IRA that you self-manage (i.e., not an employer-sponsored plan).

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