Right after college when you begin your first job, so much is thrown at you and you’re left to figure it all out. This can be very confusing and overwhelming. While most people aren’t too interested in investing and retirement plans, I love to strategize about this stuff. I also think it’s very important to START SAVING FOR YOUR RETIREMENT NOW!! Here are a few tips to help get you started.
Definitions of the main retirement plan types:
- Traditional 401(k) – employer sponsored plan (considered a benefit) in which you contribute pre-tax dollars, deducted from your wages through a payroll deduction, which the employer often matches a percentage of each dollar contributed up to a specified limit. Often times you must be employed for a certain amount of time before you fully earn the employer’s contribution. At the time the money is withdrawn, taxes are due.
- Traditional IRA – plan which you contribute pre-tax dollars to a fund which is invested for your retirement. At the time the money is withdrawn, taxes are due.
- Roth IRA – plan which you contribute after-tax dollars to a fund which is invested for your retirement. At the time the money is withdrawn, no taxes are due (because they were paid upfront); I would recommend this for most young people as hopefully your investments will grow substantially in the time until retirement.
- IRA Conversion – In 2010, the Federal law is giving everyone an opportunity to convert a traditional IRA to a Roth IRA; while this can be done any year, in 2010, the conversion doesn’t need to be reported on your 2010 tax return and instead can be split between your 2011 and 2012 return. The money must be reported because tax will be owed; as stated above, the Traditional IRA is pre-tax dollars being invested whereas the Roth IRA is after-tax dollars being invested.
Remember, start early! A few years can literally make thousands and even hundreds of thousands of dollars of difference, especially the early years because that money will have the most years to grow. If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to $5,000.
You can still contribute to your IRA for 2009 – you have until your tax filing deadline to fund your 2009 IRA.
--Rebecca Weber ’07 W.P. Carey School of Business
Arizona State Young Alumni Council Member