Navigating the World of Retirement Accounts: A Guide for 30-Somethings : TSG Financial Strategies, LLC

Navigating the World of Retirement Accounts: A Guide for 30-Somethings

As a 30-something, retirement might seem like a distant goal, but it's never too early to start planning for your future. One of the most important things you can do is to start saving for retirement now, and one of the best ways to do that is by opening a retirement account. But with so many different types of retirement accounts available, it can be overwhelming to know where to start. In this guide, we'll explore the different types of retirement accounts and how to navigate them as a 30-something.

Types of Retirement Accounts:

  1. 401(k) Plan: A 401(k) is a retirement account sponsored by your employer. You can contribute pre-tax dollars to your 401(k) and potentially contribute after-tax dollars to your Roth 401(k) if your company offers this type. Another valuable resource is that your employer may offer a matching contribution. One of the benefits of a pre-tax or traditional 401(k) is that your contributions reduce your taxable income, which can help you save on taxes today, but you pay the tax when money is withdrawn from this type of 401(k). A benefit of a Roth 401(k) is that you get to grow your investments over time without paying taxes on the gains, and then if you wait until after age 59 ½ (and 5 years from the contribution date), withdraw money without paying taxes on the growth. Which one is better? It depends on what you think your future tax rate will be… one you pay the tax today and withdraw money tax free, and the other you save on taxes today, but pay them in the future upon withdrawal.
  2. Individual Retirement Account (IRA): An IRA is an “Individual Retirement Account” that you can open on your own. You can contribute up to a certain amount each year, the current maximum contribution allowed is $6,500 for anyone under 50, the maximum each year is indexed for inflation, and your contributions may be tax-deductible depending on your income level. Once you are over 50, you are allowed to make a “catch-up contribution” in addition to the allowable maximum.
  3. Roth IRA: A Roth IRA is similar to a traditional IRA, but your contributions are made with after-tax dollars. This means you won't get a tax deduction for your contributions, but your earnings grow tax-free, and you won't owe taxes on your withdrawals in retirement so long as you wait until age 59 ½ and 5 years from the first contribution date to make the withdrawal. Just like with the traditional IRA above, you can currently contribute $6,500 for those under 50 and anyone over 50 is allowed to make a “catch-up contribution”.
  4. SEP IRA: These can be a useful tool for self-employed individuals or anyone who is a “contractor”. Being a contractor means your compensation comes from a 1099 each year. An SEP IRA may be useful if you may want to put more money into a retirement account than an IRA will permit and have the earnings to allow the contribution. Your limited to a total contribution of $66,000 or 25% of compensation.*

A 401(k) is a great option for individuals who are employed or self-employed. If you are employed by a company and receive a W2 each year, this can be an important part of your savings strategy and should be taken advantage of. If you are self-employed, you can still set up a self-employed 401(k) and may have contribution limits of up to $66,000 for 2023. These amounts are adjusted for inflation so over time, they may be higher.

It's important to note that both Roth IRAs and traditional IRAs have contribution limits and income limits that can affect your eligibility to contribute or deduct contributions on your tax return. Choosing between a Roth IRA and a traditional IRA depends on several factors, including your current tax situation, your expected tax situation in retirement, and your investment goals. Here are some general guidelines to consider:

Consider a Roth IRA if:

  • You expect to be in a higher tax bracket in retirement than you are now.
  • You want to take tax-free withdrawals in retirement.
  • You don't need the upfront tax deduction that a traditional IRA offers.
  • You want flexibility with contributions and withdrawals (Roth IRAs have no required minimum distributions).

Consider a traditional IRA or SEP IRA if:

  • You expect to be in a lower tax bracket in retirement than you are now.
  • You want to lower your taxable income now by taking advantage of the upfront tax deduction.
  • You don't mind paying taxes on withdrawals in retirement.
  • You want to contribute more than the annual limit of a Roth IRA (IRA’s have no income limits for contributions and SEP IRA’s have higher contribution limits).

After you select the right type of retirement account. Here are several tips for navigating retirement accounts:

  1. Maximize your contributions: The more you can contribute to your retirement account, the better. Aim to contribute at least enough to get the full employer match if you have a 401(k) plan. If you're able to contribute more, consider opening an IRA or Roth IRA to increase your retirement savings
  2. Choose the right investment options: Retirement accounts often give you the option to choose from a variety of investment options. Consider your risk tolerance and investment goals when choosing your investment options.
  3. Rebalance your portfolio regularly: Over time, your investment mix may become unbalanced due to market fluctuations. It's important to regularly review your portfolio and rebalance it as needed to maintain a healthy mix of investments. This is also a great way to potentially buy low and sell high when markets fluctuate.
  4. Start early and stay consistent: The earlier you start saving for retirement, the better. Even small contributions can add up over time thanks to the power of compound interest. Consistency is also key - try to contribute to your retirement accounts regularly, even if it's just a small amount each month. It can be even more important to keep investing when the markets are down, even though it may not feel like the right thing to do. When you contribute when markets are down, you are continuing to buy shares at lower prices and can buy more shares when the prices are lower. When markets recover, this can have a dramatic impact on how long it takes your portfolio to recover.

Now you’re all set! After reading this, you might be thinking that navigating the world of retirement accounts as a young adult can be overwhelming, but it's an important step in planning for your future. By understanding the different types of retirement accounts and following these tips, you can start building a solid retirement plan today. If you find yourself in the group that would like guidance about this topic or others, we are always here to help!