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How can I contribute to a retirement plan as a recent grad without a 401k.?

As a recent college graduate working part-time jobs while searching for a suitable career, I do not get the benefit of a 401k.

How can I contribute to a retirement plan?

Mar 16, 2012 by Lindsey from San Diego, CA in  |  Flag
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It is very commendable of you to start as early as you can. Saving for your own retirement is very important. Companies offering pensions are disappearing and who knows what will the future will hold for Social Security.

The maximum contribution you can make to a traditional IRA for 2012 is the amount equal to your taxable compensation up to $5,000. The maximum contribution you can make to a Roth IRA for 2012 is the same as for a traditional IRA. If you had income in 2011, you may contribute to an IRA, Roth IRA up to April 15th for 2011.

The traditional IRA may be tax deductible within certain income limits. The Roth IRA is unique because Uncle Sam promises never to tax you on its earnings.

Roth IRAs are one of the most effective ways of saving money for retirement, and research shows that people in their 20s often miss the opportunity.

If you think that taxes will be higher in the future, the Roth IRA is an ideal retirement savings vehicle. If you need a tax deduction for your current tax year, the traditional IRA is the way to go.

Comment   |  Flag   |  Mar 16, 2012 from Lititz, PA

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Robert Harper Level 16

Lindsey,

Congratulations on graduation and thinking about starting a retirement plan. Time is on your side. Starting young is the best way to increase the value of your retirement plan. Too many people delay and miss a great opportunity.

You can start a Roth IRA instead of a 401k. The contributions will not be tax deductible, as with a 401k, but with a part time job that may not be an issue. The good news is the money grows tax free and when you take it out at retirement; you don’t pay any income tax as you would if you had a Traditional IRA or 401k.

Here are a few rules. You can contribute up to $5000 per year assuming your part time job pays less than $110,000/year (if it pays more don’t give it up). Your contribution cannot be more than your earned income. You can take out your contributions with no penalties; earnings will be taxed and penalized if you take them out early.

Check into a firm where you get charged low fees such as Vanguard. You should pay no annual account fees. Your best investment at this point is probably a “target date fund” (A mutual fund designed for various projected retirement dates, yours might be something like 2055) it will give you diversification and low minimums for your initial investment. Again Vanguard is not a bad place to start looking. Make sure the fund expenses are low. Over a long period of time fund expenses can significantly eat into your nest egg.

Comment   |  Flag   |  Mar 16, 2012 from Mercer Island, Was

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Don Level 19

Hi Lindsey, You can open an IRA account at almost any brokerage and save up to $5,000 per year tax-deferred, as long as you have earned income of at least that much. A Traditional IRA will allow you to put away money before paying taxes on it, it will grow tax-deferred and then be taxed as you withdraw it (presumably in retirement). A Roth IRA is funded with after-tax money, grows tax-deferred, and no taxes are paid on qualified withdrawals. I would encourage you, however, to put in place an emergency cash reserve of at least 3-6 months expenses before you start funding a retirement that is many years away. I recently wrote a guide called the "10 Steps to Financial Wellness" which I posted to the Financial Planning topic category. You might find some additional useful tips there. I know this is a difficult environment for recent graduates and I wish you the best of luck.

Comment   |  Flag   |  Mar 16, 2012 from Middlebury, VT

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