Dear Carrie: I'm 27, and my husband is 32. We're starting to think about saving for retirement. He has a 401(k) at work, but I'm a hairstylist at a small salon that doesn't offer any retirement benefits to its employees. What's the best way for me to save? --A Reader
Dear Reader: First, kudos to you both for some smart thinking. Starting to save for retirement early is one of the most important things you can do. At your age, if you save just 10-12 percent of your annual income from now on, you should be in pretty good financial shape come retirement. At your husband's age, he might consider bumping that up to 12-15 percent.
My first thought when reading your question is that it's too bad that you're not self-employed because that would allow you to save more in a retirement account. And your husband's 401(k) makes it a bit easier for him because the money is taken automatically from his paycheck each month. (Plus, his employer may "match" some of his savings as an incentive.) But given that you don't have a savings plan from your employer, you'll simply have to set up your own retirement account and contribute to it every month. And then if you're able to save more in a regular investment account, that's even better. Here's what I suggest.
An IRA is an Individual Retirement Account that you open in your own name. It's considered a tax-advantaged account because it allows retirement savings to grow tax-deferred, which means you don't pay income taxes on the earnings as long as the money is in the account. Currently, you can contribute up to $5,000 a year to an IRA. That would be a good start to your savings.
You have a couple of IRA choices; so before you open one, you'll need to consider which is best for you.
Traditional IRA-- With this type of account, you generally get an upfront tax deduction for your contribution. Earnings grow tax-free, but you do pay ordinary income taxes when you make a withdrawal. If you withdraw your money before age 59 1/2, there's also a 10 percent penalty -- a good inducement to keep your money growing.