35 Money Questions You Should Be Able to Answer By 35
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Retirement

1. What’s a 401(k)?
A 401(k) is an employer-sponsored account where you can contribute a maximum of $18,000 pre-tax dollars in 2016 ($24,000 if you’re 50 and up). There’s a 10 percent penalty for withdrawing money before age 59½.

As an extra incentive to save, some employers match a portion of your contributions, which is essentially free money—so take advantage.

2. What’s an IRA?
IRA stands for individual retirement account. As the name implies, it’s a tax-advantaged option for saving without an employer sponsor. For 2016, you can contribute a maximum of $5,500 of earned income ($6,500 if you’re 50 or older).

There’s also a 10 percent penalty for withdrawing money prior to age 59½—except to use in specific circumstances, including qualified higher education expenses and first-time home purchases.

3. What’s the difference between a Roth and a traditional IRA?
Pre-tax contributions to a traditional IRA may be tax-deductible, depending on your income, filing status and whether you are covered by a retirement plan at work. Roth IRA savings are never tax-deductible, but the money grows tax-free. And you won’t pay Uncle Sam on your withdrawals because the initial contributions are made post-tax.

Sullivan recommends Roths over traditional accounts for income-qualifying Millennials. When you’re young, you may fall into a lower tax bracket than you will later in life, so pay the taxman now.

4. How should you save if you’re self-employed?
You can still use IRAs, but considering the contribution limit is $5,500, you should save elsewhere, too. To nab tax advantages, look into a solo 401(k), simplified employee pension (SEP IRA) or savings incentive match plan (SIMPLE IRA).

Sullivan likes the solo 401(k): “The great thing about it is you can contribute the annual amount [up to $18,000 in 2016], and your business can contribute as well. So you can double on contributing.”

5. Should you roll over your 401(k) if you change jobs?
You typically don’t have to roll over your 401(k), but it might be better if you do. Sullivan often recommends moving it to a Rollover IRA because it typically charges lower fees and offers a wider variety of investments than a 401(k). You might also consider rolling the funds into a new employer’s 401(k) to make keeping track easier.

Whatever you decide, “you need to take control of your 401(k) when you leave,” says Sullivan. Especially if it’s less than $5,000, your former employer may try to automatically distribute the funds to you, which will trigger taxes—and penalties—if you don’t roll it over within 60 days.

6. How much should you save for retirement?
You may have heard that you should aim to save 10 to 20 percent of your annual income, but everyone’s goal is different. The important thing is that you know your own answer, and have a plan to reach that magic number. (You can use online calculators, like those on BankrateVanguard and AARP, to calculate how much you need to save.)

If those big numbers are too intimidating, take a deep breath. “I always tell people to just save something—whatever is doable for you—and increase it over time,” Sullivan says.

Insurance

1. What’s the difference between a premium and a deductible?
Your insurance premium is what you pay each month for coverage. If you get health benefits through your employer, they may pay a portion and the rest is deducted from your paycheck.

A deductible is what you shell out for covered services before your insurer starts paying, and it typically does not include copayments—fees you pay for certain services, such as $15 for a doctor’s visit. Both deductibles and copays are considered out-of-pocket expenses, which you should include in your budget.

March 9, 2016

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