Where Do I Start? What I Told Our Friend About Retirement Plans…

My wife and I have a friend who recently landed a Big Tech job in town.

The whole thing sounded like a pretty sweet gig. The pay was good, the benefits seemed nice, plus they offered all the extra little “perks” you’ve heard about at these types of places… snacks in the kitchen, fancy coffee, catered lunches twice a week, a bring-your-pet-to-work policy, a gym downstairs, you name it.

As she was describing all of this, she asked a question about retirement.

It all boiled down to this: “Where do I start?”

What I Told Our Friend About Retirement Planning…

Now, keep in mind that the person in question is younger than my wife and I (in her late 20s, must be nice). So the first thing I told our friend is that the biggest asset she has on her side is time.

And before I continue, keep in mind that I am not a tax professional, and everyone’s situation is different.

With those caveats aside, here is what I told her…

1) The first thing I would do is put away every single dollar I can into a 401(k) up to whatever the company matches. It’s the closest thing you’re ever going to get to a free lunch in the financial world.

Let’s say your employer matches up to 4% of your salary dollar-for-dollar. If you make $100,000, then your $4,000 contribution turns into $8,000 — an automatic 100% return on your money. Your original contribution also reduces your taxable income. Not bad at all.

After that, this is where things become a chose-your-own adventure story of sorts. Normally, most people would say you should open an IRA next. That’s fine, but there is one little thing you may want to do first.

2) If you have a high-deductible health plan, then you should max out our health savings account (HSA) next. (My colleague Robert Rapier sang their praises here).

HSAs are great because your contributions are tax-fee. The max for 2023 is $3,850 for an individual, $7,750 for a family. You can use that money for any qualified medical expenses such as copays, prescription glasses, medicine, etc. (The IRS and your insurance provider will both have a handy guide.) You can invest this money and grow it (tax-free), although you may find that the options are rather limited. At 65, you can continue use this money for any purpose you choose (though nonqualified expenses will be taxed at your normal rate).

3) Then we get to IRAs. Again, you can choose your own adventure here in the form of a traditional or Roth IRA.

As you probably know, contributions to traditional IRAs are deductible and grow tax-free until you retire. You’ll then need to make withdrawals and pay taxes on them. The maximum amount you can contribute is $6,500.

Roth contributions are not tax-deductible, but any earnings are completely tax-free. There are also no withdrawal requirements for your principal, and you can withdraw earnings after you are 59 and a half. General rule of thumb: If you think your tax bracket will be higher later in life, do a Roth. (This is the part where I remind you to consult your tax professional.)

A major benefit to prioritizing contributions to IRAs over a 401(k) is that you will generally have a lot more options for investing your money. Most 401(k) plans only offer funds, while you can invest in individual stocks in IRAs, for example. You also won’t get eaten up by fees like with 401(k)s.

4) Then we circle back to the 401(k). You can contribute up to $23,500 in 2023. So if you still have money you’d like to save and invest, then have at it.

Closing Thoughts

There are more details about each of these options that you should research and consider. And again, each person’s situation is different, so your mileage may vary.

But this is how I laid it out for our friend. As you consider any changes or tweaks to your retirement roadmap, you might find this handy, too.

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