If you’re just starting out in your career, you probably don’t think too much about retirement. But even though it’s probably decades away, it’s never too early to start saving and planning.
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If you want to start saving for your retirement (which you should!), it can be difficult to navigate the various options available to you. Here’s what you need to know about your retirement plan options.
What to know if you are a full-time employee
Many employers offer retirement savings plans to their full-time employees. This will often come in the form of a 401(k).
“A 401(k) must be sponsored by an employer and has the ability to offer a match,” said Andrew Meadows, SVP at Ubiquity Retirement + Savings. “One of the best things about a 401(k) is the ability to save more than any other retirement vehicle. For 2022, you can save up to $20,500. For those new to the workforce , you may not earn enough to reach this limit, but the limit is much higher than if you opened an IRA, the contribution limit to an IRA is only $6,000. a much lower barrier to entry, the rewards – and often the investments – offer much greater long-term value.
However, it is important to understand how a 401(k) works. Even though it’s your retirement money, you can’t take it out early without penalties.
“If you’re a full-time employee with an employer, the easiest way to withdraw your money is when you leave your employer,” Meadows said. “That said, saver beware: there are penalties for withdrawals before retirement amounting to 10% of the total amount.”
You also need to understand the details of your particular employer-sponsored plan.
“Review your enrollment kit and understand your plan provisions,” said Whitney Jones, AIF, CPFA, pension plan specialist at Premier Wealth Management. “Plan to enroll on the next pension entry date and determine if there is an employer match you would be eligible for. Often the employer match is subject to a vesting schedule – which is another term for ownership – so make sure you understand what is on offer.
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What to know if you are a part-time employee or an entrepreneur
If you don’t have access to a 401(k) plan through your employer, you still have the option of saving for your retirement.
“You have a lot more flexibility and options in front of you, but a lot of it is DIY,” Meadows said. “Even if 401(k) [plans] are made for employers, any contract employee can become their own employer by registering for an EIN (Employer Identification Number) directly with the IRS. By becoming a full-fledged company, you can sponsor your own 401(k) and enjoy all the benefits of contributing as an employee.
Being your own 401(k) provider also allows you to contribute more to your retirement each year.
“The employee’s share of the savings is $20,500, and you can make your own profit sharing contribution. Depending on how much you contribute, you also have the option of contributing yourself, which would bring your maximum total contribution to $61,000 per person,” Meadows said.
Even if you are your own 401(k) provider, there are still penalties for early withdrawals. However, you may be able to work around this.
“If you’re an entrepreneur, be sure to set up a 401(k) with a loan provision,” Meadows said. “As a pension plan provider, it’s very difficult to tell entrepreneurs that the only way to access their funds is to terminate the plan. Not only do you have to wait a year before you can open a new one, but you also get hit with a penalty and have to start from scratch. The alternative is to find a plan provider that offers a loan provision so you have access to it when you really need it.
You can also open an Individual Retirement Account (IRA) as an alternative retirement savings option.
What everyone should know about retirement savings
Whichever retirement savings vehicle you choose, you should contribute regularly.
“It doesn’t matter the vehicle — 401(k) or IRA — make sure you have a savings plan,” Meadows said. “Budgeting is one of the most important decisions to help define how much you can actually afford to pay on your ‘retirement bill.’ By simply making a line item in your personal budget, you’ll get an idea of how much you can contribute, and this will help you set your savings goal. Since most people tend to budget based on take-home pay, you can put yourself in a situation where you set the amount and check it once a quarter.
While you can’t contribute much to your account when you’re just starting out in your career, every little bit counts.
“Start small with your savings plan,” Meadows said. “That number is different for everyone. For many savers, they are often motivated by the employer. If an employer offers a 4% match, you may want to save up to 4% to maximize the match while doubling your savings potential. In the end, it’s up to you.
It may mean making sacrifices, but the trade-off will be worth it.
“You may realize that by bringing your lunch to work a few days a week instead of dining out, you can free up otherwise ‘claimed’ dollars to contribute to your plan,” Jones said.
The good news is that by starting to save early, your retirement savings have more time to grow.
“The best part about retirement savings is the magic of compound interest,” Meadows said. “Think of it as a snowball. The more you’ve saved, the more you’ll save because of the ‘snowball’ rolling down the hill towards retirement.”
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This article originally appeared on GOBankingRates.com: Retirement Savings: Plan Options to Consider When Starting a New Job