If you’ve recently been employed — whether it’s your first job post-graduation or a new job — one of the things you should begin doing is getting your financial plan in place.
Your goal should be securing your future, and there are some things you can do now to ensure that happens. Here are three smart money moves for the recently employed.
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1. Let your employer 401(k) match be your baseline
A 401(k) plan is one of the greatest tools for saving and investing for retirement. Outside of making contributions pre-tax and lowering your taxable income, one of the greatest perks you can have is an employer match. Often, employers will match up to a certain percentage of your contributions. Whatever your employer is willing to match should be the absolute least you contribute.
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If your employer matches 3%, your bare minimum should be 3%; if it’s 5%, your minimum should be 5%; whatever the case, you should never contribute any less than what your employer is willing to match. Otherwise, you are essentially leaving free money on the table because an employer match is a guaranteed way to get 100% returns on whatever the amount is.
If you make $100,000 annually and your employer matches 5% of your contributions, that’s an extra $5,000 per year if you at least contribute that much. The 401(k) contribution limit is $20,500 ($27,000 if you’re 50 or older), so it’s unlikely you’ll get that amount matched unless you’re close to the top 1% of earners, but an employer match can account for a lot of money in your account.
2. Use a Roth IRA if you’re eligible
One of the main drawbacks of a Roth IRA is the income limit for contribution eligibility. If you’re single and earn less than $129,000, you can contribute the full $6,000 ($7,000 if you’re 50 or older). If you’re married and filing jointly, you can contribute the full amount if your income is less than $204,000. If your income is $144,000 or higher ($214,000 or higher if married and filing jointly), you’re not eligible to contribute at all.
It can’t be overstated how beneficial it is to be able to have your investments compound tax-free. If you put $6,000 into an S&P 500 fund in a Roth IRA that returned 10% annually for 30 years, you would have over $104,000 without contributing another dime. If that happened in a regular brokerage account, you’d owe taxes on that amount when you sold your stocks. But since it’s in a Roth IRA, the full amount would be yours. Take advantage of …….