Welcome to Money Moves: A 12-Week Guide To Investing In Yourself, our e-course in partnership withBlackRockthat aims to help more and more people experience financial well-being. Each week, we demystify the true cost of the milestones we want most in life—retirement, marriage, home ownership, business ventures, and more—and deliver the tools you need to achieve your money goals. That includes real stories, from real women, with *very* real financial dilemmas.
It’s never too late or too early start putting money away for retirement. Between Roth IRA’s and 401(k)’s, the jargon can be a lot to remember, so we’re here to go over the basics *and* hear from some women on how they’re currently prepping for the future.
Retirement Savings Glossary
401(k):One of the most typical retirement savings plans, a 401(k) is sponsored by your employer and allows you to set aside a percentage of your paycheck before taxes are taken out, in order to invest stocks, bonds, and other money market investments. Most companies will match how much you contribute up to a certain amount (on average, around 3%), and you won’t be able to access your money before you turn 59.5 years old (without having to pay a penalty, that is). Taxes are paid once you withdraw money from the account.
Roth IRA: Another retirement plan you’ve probably heard of, a Roth IRA can be opened at a bank or brokerage firm and allows you to select what you want to invest in (think: mutual funds, stocks, bonds, etc.). Your contributions aren’t tax deductible (like a traditional IRA), but your earnings are totally tax-free and you won’t be taxed once you withdrawal funds while in retirement.
Roth 401(k):Another employee-sponsored retirement savings account, as you can imagine your Roth 401(k) is the best of both a 401(k) and Roth IRA. The contributions you make to your Roth 401(k) are taxed, making them tax-free if you withdraw during retirement. This is the best option for those who are willing to take a bigger cut on their paycheck now, and get your money in full later on.
Traditional IRA:This is an independent retirement savings plan that can offer tax deductions depending on your income and whether or not you (or your spouse) already have a retirement plan through your work. Even if you don’t qualify for a deduction, you can still contribute to a traditional IRA, your investments will be tax-free if they’re withdraw during your retirement. Withdraw early, however, and you’ll face a 10% penalty.
Rollover IRA:Once you leave a job that had an employer-sponsored retirement plan, a Rollover IRA is where you move those funds and make sure they stay tax-free. A Rollover IRA will also likely give you more choices for what you want to invest in and potentially lower fees.
SEP IRA:To put it plainly, SEP IRA stands for: Simplified Employee Pension, Individual Retirement Account. This is a retirement savings account for small business owners and those who are self-employed. Like Traditional IRA’s, SEP IRA’s are tax deductible and your investments won’t be taxed until you withdraw them in retirement.
Backdoor Roth IRA:For those who have higher incomes and don’t qualify for a Roth, a Backdoor Roth IRA is the way to save that sweet tax-free money for retirement. It basically means that you open up a traditional IRA, convert it to a Roth IRA, then prepare to pay taxes on your traditional IRA investments and gains. Then, you’ll reap the Roth’s tax-free benefits.
How 3 Women Are Saving For The Future
Saving Up In Two Countries At Once
“I’m an American living and working in Toronto, ON so my retirement savings and investments have to follow tax rules for both countries. In the US I have a Roth IRA, traditional IRA, SEP IRA, and a rollover IRA. In Canada I have an RRSP. For most of my career I haven’t had access to employer retirement accounts, but I diligently maxed out my IRA starting in my early 20s. I have $180k in my retirement accounts. That may not seem like much, but the annual contribution limit for an IRA is $5,500 and I’m 35. My goal is to have $1 million invested, with the assumption that I could then safely have up to $40k a year to live off of [for 25 years]. My method for saving is I max out my IRA or RRSP at the beginning of the year. Right now my employer is also contributing 25% of my salary into my SEP-IRA. It took me four years to talk my tiny organization into setting up a SEP-IRA for me, so that’s new. For the past two years I’ve been investing nearly all of my salary and living off of side hustles, but this amount obviously exceeds the maximum contribution limits for tax-sheltered retirement accounts. If reaching FIRE (Financial Independence, Retire Early) was my primary goal, I’d have chosen a more lucrative career. However, I find my work incredibly fulfilling while also achieving modest financial security.” —Cori, 35, Toronto
Opting For Automated Transfers And A Savings Account
“I’m a 1099 employee and blogger, so I currently don’t have retirement plans offered through my jobs. I just have a simple savings account that is separate from all of my day-to-day accounts through a local bank. I opened it last year when I was 23—it was the easiest option for me. I was influenced by my boyfriend (who works in finance) to open a retirement plan. I didn’t do much research, but I knew I had to start somewhere and I didn’t want him to be the only one starting a retirement fund in our relationship. I am currently saving $100 per month. I have an automatic transfer scheduled on the second Friday of every month, which is when I get paid. Right now I have $3,000 in my retirement savings account. When I type out that number it doesn’t seem like a lot, but I am thankful I started when I did. I would love to have close to $500,000 by the time I am 50, which is 25 years from now.” —Shelby, 25, Las Vegas
Budgeting Like A Boss
“I have multiple retirement plans. I have a 401(k) through my husband’s employer, a regular IRA , two Roth IRAs (one is maxed out each year, the second one is not quite maxed out), and home equity in primary and rental properties. The 401(k) is an employer benefit and they match up to 5% [of my salary]. The IRA was opened when I left the workforce to stay home after having my first child. My previous 401(k) earnings were put into this IRA. The two Roth IRAs were opened as a place to put excess after-tax income. We started with one at $100 a month then worked our way up to having enough each month to max it out each year. The second one was opened a few years back and again we are working to see that it is maxed out as well.
We bought our first home in 2006 before the financial crisis. We needed to move after having our second child but at the time our [first] home was severely underwater. We balanced our overall portfolio using Roth and personal savings and rented it out and bought a slightly larger home. Both properties have gained equity and we intend to keep the rental. So far we currently have under $300,000 in 401(k) accounts, $100,000 in investments (IRA and Roth IRAs), and $215K in equity between the two properties. Our overall goal is to save $5,000,000. It’s hard to predict what Social Security will look like when I retire so knowing I have my own retirement funds available gives me peace of mind.
We manage all of this by following a monthly budget. Based off of 26 paychecks a year, we estimate how much needs to be deducted for housing, food, gas, living expenses, and putting the remainder away each month. This helps to build a liquid cash savings account to cover unexpected expenses, like medical or large purchases. It’s so important to me that my husband and I have enough in retirement so we will not be a burden on our family or the government when it comes time to retire. We hope to be able to enjoy our retirement by living freely and not having the financial worry of living on a fixed income. I am hyper aware that the savings and financial practices I act on now have a big impact for our future.” —Kristy, 39, West Sacramento, California
For more stories from women finding solutions to their financial woes, sign up for our e-course, Money Moves, in partnership with BlackRock.