Now that you have a full time job you are ready to start investing for retirement. Your corporation will match 50 cents of each dollar that you put in your 401K account up to the first $7,000. You have altogether $15,000 that you can afford to save this year. How should you split your money between your 401k account and IRA accounts? Which type of IRA account probably makes the most sense at your age? (age is 21) Explain your decisions.
To determine how to split your money between your 401k account and IRA accounts, you need to consider a few factors.
First, take advantage of your corporation's 401k match. The match is essentially free money, so it's a great opportunity. In your case, the corporation will match 50 cents of each dollar you contribute up to the first $7,000. To maximize this match, you should contribute at least $7,000 to your 401k account.
That leaves you with $8,000 ($15,000 - $7,000) to allocate towards your IRA(s).
Considering your age of 21, one of the IRA options that makes sense is a Roth IRA. Here's why:
1. Tax Treatment: Roth IRA contributions are made with after-tax money, meaning you pay taxes on the amount you contribute now but won't have to pay taxes on the earnings when you withdraw in retirement. This can be beneficial, especially if you anticipate being in a higher tax bracket during retirement.
2. Long-term growth potential: With a long time horizon until retirement, you have the advantage of compound interest. The earnings in a Roth IRA can grow tax-free over the years, potentially resulting in more substantial savings for retirement.
3. Flexibility: Since Roth IRA contributions are made with after-tax money, you can withdraw your contributions (not the earnings) without any penalties or taxes at any time. This can provide you with some flexibility in case of emergencies.
Considering these factors, you can allocate the remaining $8,000 towards a Roth IRA. It's important to note that the maximum contribution for an IRA in 2021 is $6,000 ($7,000 if you're over 50 years old). Therefore, you can fully contribute to a Roth IRA with $6,000 and then allocate the remaining $2,000 towards a traditional IRA.
However, keep in mind that individual circumstances may vary, and it is always a good idea to consult with a financial advisor or tax professional to ensure your investment decisions align with your specific goals and needs.
To determine how to split your money between your 401k account and IRA accounts, you need to consider a few factors: the company's 401k match, your total available savings, and the type of IRA account that suits your age.
First, let's address the company's 401k match. The information provided states that your corporation will match 50 cents of each dollar you contribute to your 401k account up to the first $7,000. This means that if you contribute the full $7,000, your company will provide an additional $3,500 (50% of $7,000). This match is essentially free money, so it's generally advisable to contribute at least up to the matching limit.
Next, you mentioned that you have a total of $15,000 that you can afford to save this year. Since you plan to invest for retirement, it's a good idea to maximize your tax-advantaged savings options. In 2021, the contribution limit for 401k accounts is $19,500, while the contribution limit for IRA accounts is $6,000 for individuals under the age of 50. Considering these limits, it would be beneficial to contribute the maximum allowed amount to your 401k account, which is $19,500.
Given that you have already contributed $7,000 to receive the full company match, you have $8,500 remaining. Since the maximum contribution limit for IRA accounts is $6,000, you can contribute the remaining $8,500 to a Roth IRA or a Traditional IRA.
Now, let's discuss the type of IRA account that makes the most sense for your age. At 21 years old, you have the advantage of time on your side, allowing your investments to grow over a long period. Considering this, a Roth IRA may be a suitable choice. With a Roth IRA, your contributions are made with after-tax dollars, and your withdrawals in retirement are tax-free, as long as certain conditions are met.
At your young age, you may be in a lower tax bracket, making the tax benefits of a Roth IRA particularly appealing. Additionally, the earnings on your Roth IRA investments can grow tax-free over time, providing potential long-term tax advantages.
In summary, you should contribute the maximum amount allowed to your 401k account to take advantage of the company match and maximize your tax-advantaged savings. After reaching the $19,500 contribution limit for your 401k, you can contribute the remaining $8,500 to a Roth IRA. This strategy allows you to benefit from both the company match in your 401k and the tax advantages of a Roth IRA, taking into consideration your age and long-term investment goals.