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It’s safe to say that for most college graduates entering the workforce, retirement isn’t the first thing on their mind. However, the earlier you begin saving for your retirement, the more money you’ll have to live on.
If your new employer offers a retirement plan, such as a 401(k) or profit sharing, it’s a good idea to take advantage of it. It’s an especially good deal if your employer offers to match a portion of your contributions—that’s free money!
If an employee plan isn’t an option, considering opening an Individual Retirement Account (IRA). An IRA is a plan that allows you to contribute a portion of your earned income each year. There are two types of IRAs, Roth and traditional. As of 2011, the maximum regular contribution per year is $5,000 for an individual and $10,000 for a married couple filing jointly. These limits apply to total annual IRA contributions; in other words, an individual can't contribute $5,000 to a Roth IRA and $5,000 to a traditional IRA in the same year.
The major difference between the two is how they’re taxed. Contributions to a traditional IRA are taken from pre-tax income and may be tax deductible in the year they’re contributed. These funds grow tax-deferred, meaning you’re taxed on it when you take it out at retirement. You may be penalized for withdrawals prior to age 59½ and you must begin withdrawing funds by April of the year after you reach age 70½.
Contributions to a Roth IRA are taken from post-tax dollars, which means since you’ve already been taxed on it you won’t have to pay additional taxes when funds are withdrawn at retirement. You don’t have to begin taking funds from this account until you’re ready and there’s no age limit to contributions; however, eligibility does depend on income level.
Regardless of which saving vehicle you choose, it’s important to make saving a habit. Save early and often so your account has the maximum amount of time to grow.