Twenty-somethings have a variety of expenses competing for their likely meager paychecks. But you're also in the best position of your life to begin investing for the future. If you save even a little bit in your 20s, compound interest will do much of the work of building a nest egg for you. Saving in a retirement account could further qualify you for tax breaks and employer contributions. You will be much better off in retirement if you make these financial moves during your 20s.
When you start your first job, have a small amount withheld from your paycheck and deposited in a 401(k) plan. If your job doesn't have a 401(k) plan, you can set up a direct deposit to an IRA, Roth IRA or even a savings or investment account. Automating this step means you will never skip or forget to save every month, and your nest egg will begin to build over time.
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Find a job with retirement benefits.
Remember to factor the retirement plan into your career decisions. A 401(k) match or other employer contributions are likely to be the best possible return you will ever get on an investment, and they can easily boost or even double your money over a short period of time. Also, pay attention to when you vest in your retirement benefits. While some job opportunities are too good to pass up, consider sticking around until you get to keep your employer's contributions to your retirement plan.
Don't pass up a 401(k) match.
If your employer requires you to save a certain proportion of your salary to qualify for a 401(k) match, do your best to save that amount. A 50 cent match for each dollar you save is a 50 percent return on your investment, which you are unlikely to achieve anywhere else. Employer contributions are one of the best ways to grow your retirement savings quickly.
Open an IRA.
If you don't have a 401(k) plan at work, you can get the same benefit of tax deferral by saving for retirement in an IRA. Although the contribution limits are lower, saving up to $5,500 per year in an IRA will qualify you for a tax deduction on the amount contributed and tax-deferred investment growth until you withdraw the money from the account.
Contribute to a Roth IRA.
Roth IRAs are often an especially good deal for young people who are in a low tax bracket. When you put after-tax dollars into a Roth IRA you lock in your current low tax rate. The money grows in the account without being taxed each year, and withdrawals in retirement from accounts at least five years old will be tax-free. If you should need the money before retirement, you can also withdraw your contributions – but not the earnings – without incurring the early withdrawal penalty.
Consider the myRA.
You won't experience any investment losses if you save for retirement in a myRA. The only investment option is a Treasury savings bond that is guaranteed by the government never to decline in value. The bond interest is not taxed until you withdraw money from the account. However, once you hit the maximum myRA balance of $15,000 or the account turns 30 years old, your account balance will be transferred to a private sector Roth IRA.
Claim the saver's credit.
If you have a small salary at your first job but manage to save something for retirement, you might qualify for the saver's credit. Individuals whose adjusted gross income is $30,750 or less can claim a tax credit worth between 10 and 50 percent of the amount contributed to a retirement account up to $2,000. The saver's credit can be claimed in addition to the tax deduction for saving in a 401(k) or IRA.
Roll over your savings.
When you change jobs, consider rolling your savings over to an IRA or your new employer's 401(k) plan. A trustee-to-trustee transfer between the accounts will allow you to avoid taxes and penalties on the transaction. If you withdraw your savings from the account you will need to pay income tax and a 10 percent early withdrawal penalty on the amount withdrawn.
Shop around for low-cost investments.
You don't have to be an investment expert to begin investing for retirement. Take a look at your annual 401(k) fee disclosure statement to compare the expense ratios of each fund in your 401(k) plan. Keep an eye on costs when selecting funds. Your money will grow faster if you minimize fees.
Build an emergency fund.
Ideally, the money you put in a retirement account should be used for expenses in your 60s or later. However, you will inevitably have a health problem, repair or emergency you need cash for. An emergency fund outside your retirement accounts is essential to cover sudden bills. This will also allow your retirement savings to continue to grow without penalties or interruptions.
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