Retirement Basics for 20-Somethings

Retirement accounts, taxes and compound interest can often sound like a foreign language to many 20-somethings just entering the workforce. If you want to start saving now, but have no idea where to start, you’re not alone. Opening an IRA is a great place to start, especially if you don’t have an employer-sponsored retirement account. You may have heard of IRA’s before, but what are they exactly?

IRA stands for “individual retirement account” and is a type of savings account that comes with tax benefits specifically designed to help you save for retirement. There are two main types of IRA’s – Traditional IRA and Roth IRA. The type of tax benefit you get depends on which IRA account you choose.

Traditional IRA

A Traditional IRA offers a tax deduction for the tax year the contribution is made. This means the money is not taxed until you’re ready to take it out of the account. The withdrawals you eventually make, however, will be taxed at ordinary income tax rates. 
A Traditional IRA will also require you to start making withdrawals when you turn 70 ½ and any withdrawals taken out before age 59 ½ may be subject to a 10 percent penalty. Because the money is not taxed until you make withdrawals, this may be a good option for you if you expect to be in the same or lower tax bracket when you retire. 

To learn more about Capitol Federal’s Traditional IRA and current rates, click here.

Roth IRA

Contrary to a Traditional IRA, you pay taxes on the money you invest in a Roth IRA before it enters the account, so you can make tax-free withdrawals during retirement. Since the contributions are made after taxes are paid, your contributions and interest earnings are able to grow tax-free. 

A Roth IRA does not require mandatory withdrawals at age 70 ½. Instead, you can keep making contributions past age 70 and withdraw the money whenever you please. However, like the Traditional IRA, withdrawals made before age 59 ½ may be subject to penalties. A Roth IRA may be a good choice for those at the beginning of their career expecting to be in a higher tax bracket at retirement.

To learn more about Capitol Federal’s Roth IRA and current rates, click here.

Both Traditional and Roth IRA’s have great tax benefits, but you may want to consider doing additional research before determining which best suits your needs.

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Categories: Money Smart Kids , Retirement , Strategies for Saving
Tags: Retirement Tips