So you have finally taken the first steps of your career, are right out of college, or maybe even well in to your established career and have finally paid off all your debt. Once you start to find yourself with a solid emergency fund that you are comfortable with, it may be prudent to begin a retirement fund.
We all dream of retirement one day, and in today's economic climate many people consider it to be a thing of a past. There are some products out there, such as high yield savings accounts, whose APY's fight off the effects of inflation. These rates, however, are never truly high enough to completely negate these effects.
An Individual Retirement Account (IRA) is an account specifically used for retirement funds. This account differs from savings accounts as it is a brokerage account. It does not have a baseline APY rather it relies on investments to fight inflation. Investing does have risk but strategies can be taken to reduce the amount involved while keeping your money protected from inflation.
There are different types of IRAs which can get a bit confusing. As an individual who may not be offered a retirement account from your employer just yet, the two you can consider are Traditional IRAs and Roth IRAs.
Traditional IRA: Contributions are tax-deductible but withdrawals are taxed
Roth IRA: Contributions are not tax-deductible but withdrawals are tax-free
What this boils down to is when you pay taxes on this money. If you are just starting out in your career and plan on being in a higher tax bracket in the future, then a Roth IRA would be best for you because you would be paying less taxes on the money in your retirement fund overall. Plus you have the added bonus of not having to pay any taxes on your withdrawals when you reach retirement.
There are two big limitations to consider about Roth IRAs: you cannot withdraw your money without penalty until you are 59 and 1/2 years old, and there is an annual contribution limit of $6,000. If you are contributing to a retirement fund, then you should have a comfortable emergency fund and expect to not use this money unless it is for the purpose of retirement anyway, so the age restriction should not matter much. Saving an average of over $500 every month can also be challenging, especially for people that might be just starting out in their careers, so reaching that limit might not be a concern for you either.
If you do manage to save more than the annual limit (good for you!), you can use that extra money in other retirement accounts or to increase your emergency funds!
Below I have a link to a detailed Schwab platform tutorial where you can learn more about how to open a Roth IRA with Schwab!