3. Individual Retirement Account (IRA): The Retirement Account You Own and Manage
No 401(k) at work? No worries. An IRA (Individual Retirement Account) is a retirement account you open and manage yourself (no need for an employer), offering valuable tax benefits and flexibility.
Some IRAs can simplify retirement savings, especially for those who anticipate changing jobs frequently in their 20s and 30s, by allowing the rollover of old 401(k) accounts, keeping things organized and easy to manage.
Why IRAs matter for graduates:
- Perfect for job hoppers (hello, career exploration!)
- Simplify retirement savings by consolidating old 401(k)s
- Available regardless of employment status
Your IRA options
You can contribute up to $7,000 across to Traditional and Roth IRAs or $8,000 if you're age 50 or older. SEP and SIMPLE IRAs have separate, higher contribution limits.
- Traditional IRA: You may get a tax break now, but you’ll pay taxes when you withdraw money later in retirement.
- Deduction phases out:
- Single with workplace plan: $77,000–$87,000
- Married filing jointly, covered by a workplace plan: $123,000–$143,000
- Married, only one spouse covered: $230,000–$240,000
- Roth IRA: You pay taxes on your contributions now, and withdrawals later are tax-free.
- Income limits to contribute:
- Single: Phases out at $146,000–$161,000
- Married filing jointly: Phases out at $230,000–$240,000
- SEP IRA: If you’re freelancing, self-employed, or planning to start a business, this one’s for you. It allows higher tax-deferred contributions than a Traditional IRA and is ideal if you don’t have access to an employer-sponsored plan.
If you expect to switch jobs often, like many people do in their 20s and 30s, an IRA makes it easier to stay on top of your retirement savings.
4. Rollover: Keep Your Retirement in One Place
Speaking of job changes, what happens to your 401(k) when you leave? You can either leave it where it is (and maybe forget about it), move it to your new employer’s plan, or roll it into an IRA. Cashing out is an option, but it often triggers taxes and penalties, leaving you with less now and nothing for later.
A rollover offers a way to keep your money working for you. It lets you move funds from an old 401(k) to an IRA (or from one IRA to another), helping you stay organized and in control of your retirement savings while avoiding the risk of losing track of old accounts as you switch jobs.
There are two kinds:
- Direct Rollover: Your money moves straight from one account to another, tax-free.
- Indirect Rollover: You receive the money, and you have 60 days to deposit it into a new account. Miss that deadline, and you could owe taxes and penalties.
5. Compound Interest: The Growth Hack for Savings
Last, but definitely not least, it's time to talk about compound interest. This is where the magic happens. Compound interest means your money earns interest and then that interest earns interest, too. It’s like a snowball rolling down a hill. The longer it rolls, the bigger it gets.
For example:
- You invest $1,000.
- It earns 5% interest, so you have $1,050 after year one.
- Year two? You earn interest on $1,050, not just the original $1,000. Bringing your total to $1,102.50.
- Over time, that growth adds up a lot, especially if you start young.
The earlier you start saving, the more time your money has to grow. That’s why starting in your 20s, even with small contributions, can have a bigger impact than starting in your 40s with larger ones.
Learn the Basics with PensionBee
Getting familiar with retirement basics now can help you make smarter financial decisions down the road. That’s why at PensionBee, we believe everyone deserves to feel confident about retirement, and that starts with knowledge. We offer a variety of resources, including Retirement 101, an easy-to-follow video series that simplifies complex retirement topics. Dive into The Buzz Blog for the latest retirement news and planning tips. Our Retirement Explained articles break down key financial concepts, and when you're ready to act, we make it easy to combine your old 401(k)s and IRAs into one simple account.
