Just do it — sort out your 401k 🇺🇸

There’s no mandatory retirement saving in the USA which depending on who you ask is exciting or terrifying 😜

If you do find it all a little overwhelming here’s our take on how you can start saving (well really it’s investing) for retirement in under 10 minutes. 5 minutes to read this, 3 minutes to take the first step, and 2 minutes to pat yourself on the back 😉

Where can you put your money?

There are 4 options –

1. Traditional 401(k),

2. Roth 401(k),

3. Traditional IRA (“individual retirement account”), and

4. Roth IRA.

Traditional vs Roth? 

Traditional means you contribute money pre-tax, and pay tax on withdrawals.

Roth is the opposite, contribute money post-tax, don’t pay tax on withdrawals.

401(k) vs IRA?

401(k) plans are sponsored by your employer. Not sure if you have one? Ask your manager or HR.

IRAs aren’t employer sponsored and while most people may be eligible, your contributions may be limited if your income exceeds a certain level or if your employer offers a 401(k).

Which bucket do you fill first?

If your employer offers a 401(k), start here.

Why? Because if they offer a matching program, it is essentially free money. If you do nothing else, at least contribute enough money to maximise the match.

If you have a choice of a traditional or Roth 401(k), traditional is preferred if you expect to be a lower tax bracket when you withdraw your money, and if you want to lower your taxable income upfront.

Once you’ve set up your account, don’t forget to decide what to invest in. This requires doing some research as options will vary depending on your employer’s plan. The key items to compare are returns, risk and fees. If your 401(k) website has tools and/or calculators, give them a go.


💡The short cut method: find the most financially savvy person at work and ask them what they do. Then check if what they said works for you.


Where do IRAs fit in?

Perhaps your 401(k) doesn’t give you the investment options you want, or perhaps you want to make some contributions post-tax and withdraw the money without penalty before you turn 59.5 years old (Roth IRA only). There are a variety of reasons why you might want to set up an IRA. But first, check if you are eligible.

If you have a choice of a traditional or Roth IRA, similar to the 401(k), traditional is preferred if you expect to be a lower tax bracket when you withdraw your money, and if you want to lower your taxable income upfront.

FAQ

#1 what happens if you leave your job?

You are no longer allowed to contribute to that 401(k). You can choose to keep your existing 401(k) or roll it over to an IRA. Rolling over into a Traditional IRA won’t incur taxes, rolling over into a Roth IRA will. You may want to keep your existing 401(k) if there are particular investment options that are only available in that plan.

Don’t forget to check out your new employer’s 401(k) and enrol in that!

#2 what if you don’t have a 401(k) AND aren’t eligible for an IRA?

No worries, open a regular taxable investment account and put your retirement money there.

One more thing…

🔎 If you have a spare couple of hours and want to get into the nitty gritty details, here’s the IRS link for retirement plans.

Now before you go and forget everything, go set up your 401(k) now!