By Tyler Phillips from Finhabits Advisors
Whether you just landed your first job or are getting back into the job market, it's a smart move to start thinking about your retirement. Here is some information to help you understand your options.
You've probably heard of 401ks, since they are one of the most common retirement accounts, but did you know that only 33% of part-time workers have access to retirement plans like a 401k through their job? That means it could be up to you to find ways to save for your future. While that may sound scary, there is a simple alternative that can help you save for retirement without having to rely your job for help. It's called an IRA.
What is an IRA?
An IRA, or Individual Retirement Account, helps individuals save money for retirement while offering a tax benefit for doing so. Think of an IRA like a backpack. The account is yours and you carry it with you wherever you work. On the other hand, 401ks are like great big suitcases; you can put a lot inside of them, but they aren't easy to take with you when you move on to a new job. Don't get me wrong, 401ks are great, especially if your employer offers to match your contribution, but the truth is that they just aren't practical for everyone. If you're an hourly worker, an IRA might be a better fit.
Types of IRAs
There are two main types of IRAs: Roth and Traditional. While they have the same contribution limits of $5,500 per year (if you are age 50 or younger) and are meant to grow your money over time, there are some differences in the way your money grows and rules about accessing your balance if you need to.
When you put money in a Roth IRA, you won't have to pay tax down the road. As an hourly worker, this tends to be the best option since you'll likely make more money in the future (and want to pay less taxes). With a Roth, you may withdraw the money you put in without having to pay any penalties.
A Traditional IRA helps you save on taxes today, but you will have to pay tax when you withdraw the money during retirement. If you're making a lot of money now, a Traditional IRA is typically a good idea. That said, Traditional IRAs are more restrictive. If you withdraw money you put in before retirement, you will have to pay tax and a penalty. However there are exceptions to this rule; if you use the money to buy a house or pay a medical expense, you'll pay tax but no penalty.
According to a study by the Bureau of Labor Statistics, most individuals will have, on average, more than eleven jobs between the ages of 18 – 48. With all that moving around, IRAs are a great fit for today's worker. At the end of the day, it doesn't matter what type of backpack you have, but it's important to have one when you head to your next shift.
Visit finhabits.com for more info on how to start saving for retirement with as little as $5 per week.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Finhabits advisors does not provide legal or tax advice and if you have questions regarding your personal circumstances, you should consult a tax or legal professional.