What You Should Know about 401ks and IRAs When You Start Your First Job

You’ve graduated and landed your first job. If you start investing early, that $5 you’re about to spend on coffee could grow to $100 by the time you retire. Thanks to compound interest, which means you’ll be earning interest on your interest, the younger you start, the bigger and faster your nest egg will grow. But before you invest your hard-earned money, there are some things to know about 401ks and IRA plans. Free Money… seriously If your employer offers you a 401(k) or a plan that has a matching program, consider it free money. It could mean thousands of dollars per year. Let’s say you’re making $45,000 and your employer offers you a 50-percent match of 6-percent of your salary. That would likely be $1350 in free money by the end of the year. Some 401(k)s also allow you to take loans against them. Cons: You might not have as many investment choices as an IRA, administrative costs may be higher and your money is generally on lockdown until you’re 59½. The annual contribution limit is $18,000. If there’s no sponsored plan, start a Roth IRA or traditional IRA as soon as possible. What’s better, a Roth or Traditional IRA? It’s not as confusing as it sounds. People under 50 can contribute $5,500 per year to either one. The big difference them is when you’ll pay taxes. Traditional IRA like a traditional 401(k), it offers tax-deferred growth. Pros? You don’t have to pay taxes on your money until it’s withdrawn and, if you don’t have a 401(k), some contributions reduce your taxable income. If you follow the rules,...