It’s never too early to begin setting yourself up for retirement — and getting started is easier than you think. Here are three different types of retirement savings vehicles that you can set up now and watch them grow into the future.
401(k) or 403(b)
How it works: If your employer offers a retirement savings plan, it is likely a 401(k), or if you work for a nonprofit or government entity, a 403(b). These employer-sponsored retirement savings plans allow workers to save and invest a part of their paychecks before taxes are taken out. And taxes are not paid until the money is withdrawn from the account. By contributing to your employer’s 401(k) or 403(b), you don’t just save for retirement, but you also reduce your current tax bill.
How much you can invest: The Internal Revenue Service (IRS) sets limits for how much employees are allowed to contribute to their 401(k) accounts. For 2019, employees are allowed to save up to $19,000 in a 401(k), an increase from $18,500 in 2018. Employees over the age of 50 can contribute an extra $6,000 per year.
If you don’t plan to contribute the full amount, make sure you contribute at least enough to earn any matching benefits offered by your employer. For instance, if your employer matches workers’ contributions up to 6 percent of their salaries, make sure you contribute at least 6 percent of your salary. Otherwise, you’re leaving free money on the table.
When you can access it: When you reach the age of 59 ½, you can start withdrawing from your 401(k) account without paying any penalties. There are a few options for accessing the money earlier, such as taking a loan from your 401(k) or qualifying for a hardship withdrawal, but they often involve paying fees or penalties — and they run counter to your goal of saving for retirement.
How it works: An individual retirement account (IRA) is a savings vehicle that offers tax breaks for investing money for retirement. Traditional IRAs allow you to invest money before paying taxes on it, letting the investments grow tax-free, and you pay tax on it when you make withdrawals. With Roth IRAs, you invest money after paying taxes on it, and you don’t have to pay tax upon withdrawing the money or its earnings. To use a Roth IRA, your income must be under a specific level set by the IRS: In 2019, individuals must earn less than $122,000 and couples must earn less than $193,000 to contribute to a Roth IRA.
How much you can invest: The IRS also sets limits on how much you can contribute to an IRA each year. For 2019, the annual IRA contribution limit is $6,000, or $7,000 if you’re over the age of 50. This reflects an increase from $5,500 in 2018.
When you can access it: You can begin withdrawing from your IRA without paying any penalty when you reach the age of 59 ½. When you reach the age of 70 ½, you’ll be required to make regular withdrawals from a Traditional IRA.
How it works: A Health Savings Account (HSA) is intended to help people save up for healthcare expenses, but it can also be used effectively as a retirement savings tool. To open an HSA, you must have a health insurance plan that includes an HSA option. Then you can make tax-free contributions to the account.
How much you can invest: In 2019, people with individual health plans can contribute up to $3,500 to an HSA, and $4,500 if over the age of 50. People with family health plans can contribute up to $7,000, or $8,000 if over the age of 50.
When you can access it: You can access the funds in your HSA at any time for qualified medical expenses. (Using the funds for purposes other than qualified medical expenses incurs a 20 percent penalty.) However, if you’re able to pay for medical expenses out of pocket, invest the funds in your HSA, allow them to continue to grow and become an important component of your retirement plan. And if you wait until you’re 65 to start using the funds, you can use them for health expenses or any other expense—and the 20 percent penalty no longer applies.
Take steps to set up retirement savings vehicles, even if you're just starting out in your career. You'll get in the habit of saving for the future and take advantage of compounding returns over time, allowing your nest egg to grow significantly larger than if you started saving later in life.