Dear Carrie: I'm especially young in my career (right out of college), but I want to start saving for retirement. What's better, a Roth IRA or a 401(k)? Should I contribute to both or only one? Where should I put most of my savings? --A Reader
Dear Reader: First, kudos for thinking about starting to save for retirement now. Most people your age don't. That's not a surprise. After all, you're just starting out on your own and have many other financial firsts to deal with, such as rent, insurance, car payments -- all the economic responsibilities that come with being independent. But to me, starting to save -- especially for retirement -- is probably the most important financial step you can take. So, thanks for giving me the chance to once again talk about one of my favorite subjects.
SETTING YOURSELF UP TO SAVE
Both a Roth IRA and a 401(k) are excellent ways to save for retirement. And you don't necessarily have to choose between them. In fact, in the right circumstances they can work together.
At your age, here are some things to think about:
Start with your 401(k) -- If your employer offers a 401(k), take advantage of it. Contribute at least up to the company match; it's like getting free money. Plus, it's easy. Your 401(k) contributions are taken directly out of your paycheck, so you won't really miss the money. Also, contributions are tax deductible, reducing what you might owe Uncle Sam, and you won't pay taxes on your earnings while your money grows. However, you will pay income taxes on both your contributions and your earnings when you withdraw your money after age 59 1/2.
Consider opening a Roth IRA -- If you don't have a 401(k) at work, definitely open a Roth. Chances are at this stage of your professional life, you'll fit within the current income limit of $105,000 for single filers. Contributions to a Roth IRA aren't tax deductible up front, but your earnings grow tax-free, and withdrawals are tax-free when you wait the requisite number of years. Since there's a good possibility that you'll be in a higher income tax bracket when it comes time to make withdrawals, this could be a tremendous benefit. And even if you do contribute to a 401(k), you could still open a Roth IRA to cover all your bases and save even more. Currently, you can contribute up to $16,500 to a 401(k) and $5,000 to an IRA. That's a lot of potential savings!
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