I had an interesting conversation about retirement planning with my daughter, Maren. She is a recent college graduate and was open to the discussion (not once did she roll her eyes at me!) She wants to plan for retirement and knows to begin early in her career.
When I was that age, making a retirement plan wasn’t even a topic of conversation as employers took care of retirement funding. We know those days are over and it’s important to use as many vehicles as are available to put money away for the retirement years.
One such vehicle is an Individual Retirement Arrangement (also known as an Individual Retirement Account or IRA). Here are just a few IRA basics to think about if you are a young, working person or if you want to encourage a young person to start retirement planning.
A person can open an IRA account as long as there is earned income to support the contributions. Babysitting, lawn mowing, snow shoveling, a store clerk, etc.: all are considered earned income. Just note however, that you cannot contribute more than your annual earned income; in other words, if a person earns $500 annually, no more than $500 can be contributed to their IRA account. Additionally, the 2013 contribution limit will be $5,500 for an individual under 50 years of age — an increase of $500 from 2012.
There are two different types of IRAs: Traditional and Roth. Traditional IRAs are funded with pretax dollars and grow tax deferred. A Roth IRA grows tax free as contributions are made with after-tax dollars.
As a fun experiment, plug in a desired contribution amount and an age bracket into this Roth IRA calculator. You will be shocked to see how much can be saved for retirement if funding is begun early on.
A little bit saved is better than nothing at all. And if you start early, you’ll give your investments more time to grow. So even if you can’t contribute much, start early — and encourage others to start early, too.