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Breaking Down 401(k) and IRAs, Millennial Style

More than half of the American millennial population are in debt. Please, hold your gasps of disbelief. A week doesn’t pass without a journalist or blogger commenting on millennials drowning in debt. Whether it’s from credit cards or student loans, we’re facing a serious problem. Yet, Wells Fargo released a 2013 report stating 61% of millennials see themselves as “savers.” Umm, Please.


Don’t let confusion stop you

Why am I a skeptic? Because too many of my fellow millennials have been resistant to start saving for their retirements. Maybe they’ll save up for a large purchase, but why aren’t people taking advantage of employer matched 401(k) accounts or in the absence of a 401(k) option, opening an IRA?

Don’t understand them? Well that’s easy to fix. “A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.” – IRS.gov. Oh sorry, did your eyes just glaze over? I don’t blame you. In millennial speak it’s translated to, “you invest some of your hard-earned cash and (hopefully) your employer matches your contribution up to a certain percentage.” Essentially, your company is offering you free money, usually because you don’t have a pension plan.

IRA stands for Individual Retirement Arrangement, a pretty straight forward acronym. Similar to the 401(k), an IRA is the vehicle to invest in a variety of options including stocks, bonds, mutual funds and even nontraditional options like real estate or precious metals. However, an IRA (typically) isn’t matched by your employer. There are two* basic options for your 401(k) and IRAs: traditional or Roth. A traditional account gives you a tax break now. Your money will be invested before taxes and you’ll owe the government money when you withdraw your funds in retirement. A Roth does the opposite, you’ll pay taxes now (which means it doesn’t lower your taxable income) and smirk at Uncle Sam when you’re old and wrinkly (or retire early).

Start planning!

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