Have you ever asked yourself, when is the right time to start saving for retirement?
As a young adult, retirement might seem far away, especially when you have other financial priorities. Getting an education, starting a job, paying bills and paying off student loans are all expensive obligations that can tie up your finances. With so many responsibilities, retirement planning can feel like something to figure out later.
However the saying, “the early bird gets the worm,” is especially true in retirement. The earlier you start to save, the better off your future finances will be. Not only do you have compound interest on your side with early retirement savings, but you also have more time to build a big nest egg with small contributions.
If you take advantage of tax incentives and pay attention to your account features, saving for retirement can actually benefit you throughout your life. Here are some facts about Individual Retirement Accounts (IRAs)
that can make saving for the future even more appealing.
Saver's tax credit
Did you know that your retirement contribution could lead to a tax credit?
The IRS has a special tax break called the Saver's Credit
for low income people who contribute to an IRA. As you earn your first paycheck or start your career, an IRA tax break can give your retirement savings a more immediate payoff.
The Saver’s Credit does have some restrictions. You must be 18 or older, not a full-time student and not claimed as a dependent on anyone else’s tax return. Also, you must not exceed the income limits set by the IRS.
If you qualify, you could earn a tax credit of up to $2,000 as an individual or up to $4,000 as a married couple filing jointly. For more information, check out the IRS website
or consult your tax professional.
Contribute earned income
In order to contribute to an IRA, you need to have earned income. That means you need to have a job and file taxes for the year you’re contributing to the account. However, your IRA contributions are not limited to the income from your job — you can contribute income from any source.
Cash gifts make great IRA contributions. If you receive money during the holidays or as a bonus at work, consider setting aside a portion and using it to fund your IRA. It may not be immediately gratifying, but small contributions throughout your life can add up to a secure retirement.
Also, if your family prefers cash gifts, keep in mind that anyone can contribute to your IRA. When your birthday rolls around, share your retirement goals with family members, give them information about your IRA and encourage them to help you save for the future. Sometimes your family will be even more generous when they feel their money is being used for a good purpose.
There are different types of IRAs that come equipped with unique features and tax benefits. Use those features to your advantage in your financial plan. Distributions from a Roth IRA
, for example, are tax and penalty free if you only take out funds that were contributed to the account.
In other words, you can fund a Roth IRA and let your money grow over the course of several years. Later, when you’re ready to buy a house or make a major purchase, you can withdraw your original contribution tax and penalty free as long as you don’t take out any of the dividends your money earned.
Obviously, the point of contributing to an IRA is to leave the money alone until retirement, but if you need to access the money in an emergency or make a major life move, you can.
have different features that do not include early distribution. Money taken out of a Traditional IRA before you reach the age 59 ½ can be hit with an early distribution penalty of 10%. There are exceptions for first home purchases and qualified higher education expenses, but in general early distributions will be hit with a penalty.
It’s important to remember that your financial priorities will change throughout your lifetime. As a young adult, more immediate goals, like paying for school or purchasing your first car, are understandably higher on the priority list. However, even when retirement isn’t your most important financial goal, make sure it’s on your radar.
When you near retirement, you won’t regret having more money to secure your future. Make a commitment to your financial future at a young age and not only will you have time on your side, but you’ll also have a number of tax incentives and account features that can benefit you along the way.