When I graduated from school and started working, my parents and friends told me repeatedly how important it was to start saving for retirement. But when I looked into opening an account, most institutions required $1,000 or more to get started. I didn’t have that much money to set aside, and it seemed so overwhelming. So I didn’t open an account until years later.
I’m kicking myself for it. The earlier you start saving for retirement, the more compound interest it builds and the less you need to invest to retire comfortably. I missed out on years of interest because I was too intimidated by account minimums, and didn’t think of alternatives. (See also: 10 Signs You Aren’t Saving Enough for Retirement)
Instead of making my same mistakes, you can start saving for retirement today by opening a Roth IRA. Below, find out why Roth IRAs are such a useful option and where you can open one without a lot of startup cash. (See also: 4 Reasons Why a Roth IRA May be Better Than Your 401(k))
What is a Roth IRA?
If you’re just starting out, don’t have access to a 401(k), or want to supplement your retirement nest egg, a Roth IRA is a fantastic savings vehicle.
Unlike a 401(k), where you make your retirement contributions with pretax dollars, with a Roth you contribute your after-tax income. While that means you don’t get an upfront tax break, you won’t owe money on account withdrawals once you retire. You already paid taxes, so you can take out the money free and clear.
A Roth IRA is a perfect tool for young people just starting out. Because your contributions are made after taxes, you can take out the principal from the Roth IRA in the…
More and more Americans are choosing an employer-sponsored 401(k) as their preferred way to build up their nest eggs. As of 2014, an estimated 52 million Americans were participating in a 401(k)-type plan.
When used properly, a 401(k) can be a powerful tool to save for your retirement years, but there are a couple of crucial pitfalls that you have to watch out for. From high fees to limited investing choices, here is a list of potential downsides to 401(k) plans — and how to work around them.
1. Waiting to set up your 401(k)
Depending on the applicable rules from your employer-sponsored 401(k), you may be eligible to enroll in the plan within one to 12 months from your start date. If your eligibility kicks in around December, you may think that it’s fine to wait until the next year to set up your retirement account.
This is a big mistake for two main reasons.
First, contributing to your 401(k) with pretax dollars allows you to effectively reduce your taxable income for the current year. In 2017, you can contribute up to $18,000 ($24,000 if age 50 or over) to your 401(k), so you can considerably reduce your tax liability. For example, if you were to contribute $3,000 between your last two paychecks in December, you would reduce your taxable income by $3,000. Waiting until next year to start your 401(k) contribution would mean missing out on a lower taxable income!
Second, your employer can still contribute to your 401(k) next year and make that contribution count for the current year, as long as your plan was set up by December 31 of the current year. Your employer contributions have to be in before Tax Day or the date that you file your federal taxes, whichever is earlier.
How to work around it
If you meet the requirements to participate in your employer-sponsored 401(k) toward the end of the year, make sure to set up your account by December 31st. That way, you’ll be ready to reduce your taxable income for the current year through your own contributions and those from your employer before their applicable deadline (December 31 and Tax Day or date of tax filing (whichever is earlier), respectively).
2. Forgetting to update contributions
When you set up your 401(k), you have to choose a percentage that will be deducted from every paycheck and put into your plan. It’s not uncommon that plan holders set that contribution percentage and forget it. As your life situation changes, such as when you get a major salary boost, marry, or have your first child, you’ll find that your contributions may be too big or too small. (See also: 5 Times It’s Okay to Delay Retirement Savings)
How to work around it
To keep a contribution level that is appropriate to your unique financial situation, revisit your percentage contribution every year and whenever you have a major life change. Don’t forget to also check whether or not you elected an annual increase option — a percentage by which your contribution is increased automatically each year — and adjust it as necessary.
3. Missing out on maximum employer match
Talking about contributions, don’t forget that your employer may contribute to your plan as well. In a survey of 360 employers, 42 percent of respondents matched employee contributions dollar-for-dollar, and 56 percent of them only required employees to contribute at least 6 percent from paychecks…
At some point in your life, you may have to retire. This phase can be challenging, intimidating, and even overwhelming, especially if you’re not really sure how to make the necessary adjustments.
To make your transition more simple, here are some of the best retirement planning tips you can try.
Ease Into Things
Suddenly stopping working after so many years can be incredibly tough so avoid rushing the process.
If working part-time for your employer is an option, consider it. If not, you might want to do some freelance work in your field for a while.
You can also use your hobbies to get more involved in work and find ways to stay busy. It might be teaching piano, sharing your love of painting, or crafting and selling your items online.
At your retirement party, network with other coworkers who’ve already retired to see what jobs they’ve taken up. There are a lot of options, so find something that can keep you busy and your mind occupied.
Every year, about three per 1,000 Americans divorce from their spouse. Since about seven per 1,000 Americans marry every year, there is a chance that some divorcees will eventually tie the knot again with a new partner.
But before you remarry, you should evaluate your finances. Let’s review eight money moves that will set you both up for financial safety and success.
1. Make Amendments to Your Will (or Make One!)
The joy of finding love again can make you look at everything through a rosy filter. While no one likes thinking about their mortality, especially close to a big wedding day, the reality is that not updating your will could leave your new partner (and potential dependents) with a messy court battle for your estate. Review your current will and update it as necessary. For example, you may redistribute your estate to include your new dependents and choose a different executor — a person who will manage your estate and carry out the orders in your will.
If you don’t have a will, then setting one up should become the top priority of all money moves before you remarry. In the absence of a will, a judge will appoint an administrator who will execute your estate according to your state’s probate laws. What is legal may not be the ideal situation for your loved ones, so plan ahead. (See also: What You Need to Know About Writing a Will)
2. Update Beneficiaries Listed on Your Retirement Accounts
Even after setting up or updating your will, you still need to update the list of beneficiaries listed for your retirement accounts. This is particularly important for 401K plan holders. The Employee Retirement Security Act (ERISA) stipulates that a defined contribution plan, such as a 401K, must provide a death benefit to the spouse of the plan holder.
Your beneficiary form is so important that it can supersede your will under many circumstances. When updating your beneficiary form before you remarry, there are three best practices to follow:
Get written consent from your previous spouse, if applicable, to make changes;
Second, designate only children who are of legal age so they can actually carry out their wishes;
Third, find out the tax implications for beneficiaries other than your spouse as a large windfall could unintentionally create a financial burden.
3. Consider Setting Up a Trust
Since we’re talking about potential financial burdens, many of them could come out of an estate with lots of valuable assets being divided among many beneficiaries, many of them very young.
When you have accumulated a lot of wealth over the years, you could be better served by a trust than by a will for several reasons, including keeping your estate out of a court-supervised probate, maintaining the privacy of your records, and allowing you to customize estate distribution. While the cost of setting up a trust can be up to three times that of…