Retirement Accounts
For most high school and college age students, a Roth IRA is the retirement account that is best for them because of how taxes work.
With a Roth IRA, you pay taxes on the money you put in now, but you don’t have to pay taxes when you take the money out after you retire. Since people typically have lower incomes and are in lower tax brackets when they are younger, paying taxes now is typically better. Most people expect to be in a higher tax bracket when they retire.
Another advantage of a Roth IRA is that you can take out the money you put in at any time without penalties or taxes. This can be useful for emergencies or big expenses like buying a first home.
Also, unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs) when you reach a certain age. This means you can leave the money in the account to grow tax-free for as long as you want.
Roth IRA
Who Uses It: People who think they might be in a higher tax bracket when they retire.
How Much You Can Put In: You can save up to a certain amount each year, depending on how much you make.
How Taxes Work: You pay taxes on the money you put in now, but you don’t pay taxes when you take the money out after you retire.
When You Can Take Money Out: You usually have to wait until you’re at least 59 1/2 to take money out. If you take it out earlier, you might have to pay a penalty.
Who Can Get It: If you have earned income and meet certain income limits, you can probably use it.
Here are other common types of retirement accounts:
401(k)
Who Uses It: People who work for big companies usually use this.
How Much You Can Put In: You can save up to a certain amount from your paycheck each year.
How Taxes Work: You don’t pay taxes on the money you put in right away. You pay taxes when you take the money out after you retire.
When You Can Take Money Out: You usually have to wait until you’re at least 59 1/2 to take money out. If you take it out earlier, you might have to pay a penalty.
Who Can Get It: If your job offers a 401(k), you can probably use it.
Traditional IRA:
Who Uses It: People who don’t have a 401(k) or want to save more money for retirement.
How Much You Can Put In: You can save up to a certain amount each year, depending on how much you make.
How Taxes Work: You don’t pay taxes on the money you put in right away. You pay taxes when you take the money out after you retire.
When You Can Take Money Out: You usually have to wait until you’re at least 59 1/2 to take money out. If you take it out earlier, you might have to pay a penalty.
Who Can Get It: If you have earned income and don’t have a retirement plan at work, you can probably use it.
403(b)
Who Uses It: People who work for schools, hospitals, or non-profit organizations.
How Much You Can Put In: You can save up to a certain amount from your paycheck each year.
How Taxes Work: You don’t pay taxes on the money you put in right away. You pay taxes when you take the money out after you retire.
When You Can Take Money Out: You usually have to wait until you’re at least 59 1/2 to take money out. If you take it out earlier, you might have to pay a penalty.
Who Can Get It: If your job offers a 403(b), you can probably use it.
SEP IRA and SIMPLE IRA:
Who Uses It: People who are self-employed or own a small business.
How Much You Can Put In: You can save up to a certain amount each year, depending on how much you make.
How Taxes Work: You don’t pay taxes on the money you put in right away. You pay taxes when you take the money out after you retire.
When You Can Take Money Out: You usually have to wait until you’re at least 59 1/2 to take money out. If you take it out earlier, you might have to pay a penalty.
Who Can Get It: If you’re self-employed or own a small business, you can probably use it.
Remember, as a young adult, it’s essential to talk to a trusted friend or family member to help you understand which retirement account is best for you and how to use it wisely.