1. What’s a 401(k)?
A 401(k) is an employer-sponsored retirement account where you can contribute a maximum of $18,500 pre-tax dollars in 2018 ($24,500 if you’re 50+). There’s a 10-percent penalty for withdrawing money before age 59½, and you'll pay regular income taxes.
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 2018, 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?
Contributions to a traditional IRA may be tax-deductible, depending on your income, filing status and whether you (or a spouse) are covered by a work retirement plan. Roth IRA savings are never tax-deductible today, but the money grows and can be withdrawn in retirement tax-free.
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 traditional or Roth IRAs, but considering the lower contribution limits, you should save elsewhere, too. To nab tax advantages, look into a solo 401(k) and simplified employee pension (SEP IRA), which each allow contributions up to $55,000 (or 25 percent of compensation in the case of SEP IRAs) in 2018.
5. Should you roll over your 401(k) if you change jobs?
You typically aren't required to roll over a 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 Bankrate and Vanguardto 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.
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.
This post was updated in July 2018.
March 9, 2016
March 9, 2016