I didn’t move that money, but my kids did and yours should too

I grew up in a comfortable middle class household. My mom didn’t work outside the home and my dad was a criminal attorney for most of my childhood. He worked mostly for people he believed had been “wronged” either by circumstances or by society. He was the kindest and smartest person I ever knew, but saving for a rainy day, let alone retirement, was not a priority.

Long story short: I had never heard of an IRA or any other type of retirement savings plan when I started working full time. Like my father, I was self-employed for most of my career and only had two jobs that offered a 401(k). Confession: I’ve been somewhat inconsistent with my own retirement planning.

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I don’t have a good excuse for not getting a better handle on saving, but I’ve made sure my kids – Liam (27), Julia (25) and Carina (20) – plan smarter than I ever did.

Related: Here’s Your Biggest Retirement Regret—And How To Avoid It

My older children studied economics in college and opened IRAs while they were still full-time students. I encouraged them to make saving a priority and a habit. It seems to work.

Differences between Roth, Traditional and SIMPLE IRAs

There are three different types of IRAs available for retirement savings. The type you choose will depend on a number of factors, including your age and whether or not you are self-employed.

Note: Each IRA has pros and cons, and the descriptions here are pretty straightforward, so be sure to discuss the options that fit your circumstances in detail with your tax preparer and/or financial advisor.

Roth IRAs

Most financial planning experts will recommend a Roth IRA for people in their 20s. With a Roth IRA, contributions are made after-tax, meaning you won’t get an immediate tax break. However, in return, your investments will grow tax-free, and any withdrawals you make in retirement will also be tax-free because the contributions are not tax-deferred.

Liam started a Roth IRA when he was 22 and still a full-time student, putting in a small amount each month, mostly from scholarship money he didn’t spend. “With a Roth it’s tax-advantaged,” he says. “You can do a little bit each month and it compounds over time; it’s mandatory saves because I can’t take it out anytime.”

The lack of flexibility prevents him from accessing the money and he sees this as beneficial.

Plus, he knows he’s already paid taxes on the money, so when he accesses it one day, he won’t be taxed on the earnings. He has no student loans so he can focus on savings.

Julia started her Roth IRA when she was 18 and has put in at least a few bucks every month since then.

“I understand the benefits of compound interest, so I want to make sure my money is working for me,” she says. “And even if I go back to school full-time and only work part-time, I’m still contributing to the IRA because I don’t want to lose three years of that compounding interest.”

A Roth IRA currently allows you to invest a maximum of $7,000 per year, and while she can’t reach that level, she says she will when she graduates.

Julia will also have student loans to pay, but she has promised herself that she will at least “max out” her IRA each year. Even if that’s all she makes, she’ll have $1.1 million for retirement when she’s 65, according to this retirement calculator.

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Traditional IRA

A traditional IRA is an account to which you can contribute pre-tax or after-tax dollars. Contributions may be tax deductible depending on your situation, which can give you the immediate benefit of reducing your taxable income.

Traditional IRAs are often a good option for people who expect to be in the same or lower tax bracket in the future. Pay ordinary income tax on your withdrawals.

JUST ANGER

A Savings Incentive Match Plan for Employees (SIMPLE IRA) is an employer-sponsored retirement plan for small businesses that do not already offer a retirement plan.

If your employer offers a SIMPLE IRA instead of a 401(k), financial experts generally recommend participating. This is because employers are required to match employee contributions, up to 3% of your salary, making it a valuable way to boost your retirement savings.

A couple is seen planning for retirement.

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401(k): If you have access to one, don’t lose it

As with IRAs, there are many variations of 401(k) plans, but the basics are all the same. With a 401(k) plan, you have the option to defer a portion of your salary, which means you choose to set aside a portion of your earnings, which is then contributed to a 401(k) plan sponsored by your employer.

Some employers also match employee contributions, up to a certain amount. This deferred income is generally not taxed until you withdraw it in retirement.

Related: Dave Ramsey Reveals Major Retirement, 401(k), Social Security Strategy Not to Miss

Liam has been working for almost five years at this point and has access to his company’s 401(k), but his employer is not matching his contributions. “I do get the occasional bonus, though, so I always divert some of that into my 401(k),” he says. “At the same time, I’m also trying to build an emergency savings fund because I don’t want to have to liquidate any retirement savings.”

Liam says that when it comes to his current retirement savings plan, his only regret is “not buying foreclosed real estate when I was in high school.”

However, hindsight is not a retirement savings solution, so be like my kids and get those IRAs and/or 401(k)s going.

Have a retirement or investment story to share? Email: [email protected]

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