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Breaking Down 401(k) and IRAs, Millennial Style

   Posted On: May 30, 2013  |    Posted In: Personal Finance 101  |     Posted by: Broke Millennial®

Part II in my on-going series about retirement accounts. Read Part I here and Part III here.

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.

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?

  • I don’t make enough money.
  • I need to pay down debt.
  • I don’t trust the stock market.
  • I’ll worry about it in the future.
  • I don’t understand them.

Those are a few of the answers I’ve received from my peers. As a fellow millennial, I’m not here to bash those who feel justified in their decisions to procrastinate preparing for their future. Hey, it’s your choice and I’ve been there. However, I hope people make an informed, rational decision not an emotional one. Those first four answers usually means the person is a lost cause, for now, and the conversation ends.Then my face looks something like this (on the right):

skeptical erin

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.” –

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.

If you don’t have a full-time job, your company doesn’t offer a 401(k) or they do and the match/investment options are terrible then consider an IRA.

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).

Additionally, the Roth IRA comes with income limits. In 2016, if a single (as in unmarried) millennial has to be making less than $117,000 to contribute up to the limit ($5,500 for 2016) or less than $184,000 if you already got hitched. The traditional IRA gets capped based on income and whether or not you (or your spouse) are covered by an employer-sponsored 401(k) at work. In 2016, you get no deduction if you are covered by an employer and have an adjusted gross income (AGI) of more than $71,000. The IRS does a fine job of breaking down the difference between a traditional and Roth IRA in this handy chart.

If none of these points make you want to budge consider this: consistently contributing to your 401(k)/IRA, making wise investments and maxing out an employer match is one of the simplest ways to become a millionaire.

*Okay, there are more but we can get into SIMPLE 401(k)/IRAs and SEP IRA/ Self-employed 401(k)s another time.

The post originally ran on May 30, 2013. It has been updated to reflect current numbers. 

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34 responses to “Breaking Down 401(k) and IRAs, Millennial Style

  1. You can break it down even further by saying “if you contribute money to these things regularly, you’re going to have a TON of money when you’re 59 1/2 years old.” plus the earlier you invest, the more compound interest you’ll, it makes sense to put money into these vehicles even when you still have debt, because consumer and student loan debt don’t have the magic ability of compounding like your investments do.

    1. Thanks, JM! I think the money part deserves a huge paragraph in a future post, especially comparing the difference a year can make. I completely agree about investing in a 401(k) or IRA while you’re still in debt. Hopefully this series can change a few people’s minds.

    2. Great topic… Too many people (myself included, and let’s just say my KIDS are the millenials) wait too long to invest in their retirement. I thought I needed the money THEN not later. It’s amazing though how we tend to live on what we bring home (and then some). If I bring home less, go figure, I spend less. But that’s another post…

    3. “it makes sense to put money into these vehicles even when you still have debt, because consumer and student loan debt don’t have the magic ability of compounding like your investments do.”

      Consumer and student loan debt absolutely do compound. This is the primary source of massive consumer debt. Unless your return from investment (minus any considered capital gains taxes if they pertain) is surpassing the negative return from your debt, you are going to be better off paying down debt first.

      1. The point is that you are better off saving as early as possible. Compound interest will either be your best friend or worst enemy. Obviously the interest on outstanding debt causes an issue as well, but you should still be saving (especially having an emergency fund) while you have some debt, otherwise you could end up in an even worse situation. I also believe even people with debt should be contributing to a company-matched 401(k). It is throwing away free money otherwise.

        1. I guess contributing to 401k with paper money isn’t a worth idea,it is well known that the gov are printing more of these papers,and if some economic forecats go right about another economic collapse ,those dollars in our IRAs will be worthless,this is why I think investors should seek to diversify with something tangible and that keeps value,in my opinion ,gold will be the best option for this purpose.

  2. Corrections:
    IRA stands for Individual Retirement Arrangement
    the contribution limit is $5,500

    My work doesn’t extend 401(k) benefits to students so we are using Roth IRAs for now. We’re in the 15% tax bracket so we think it’s a safe bet that we’ll be in a higher on in retirement. I really really love our IRAs and will prioritize them (Roth or traditional) over non-matched 401(k) contributions because the fund selections are not limited. With all the horror stories coming out recently about 401(k) fees it’s hard to get excited about having that option unless there is a match.

    One more relevant point for millennial grad students is that you can’t contribute to an IRA without earned income. That means if you’re paid by a fellowship you likely can’t contribute (more details in my link). Most people don’t know about that!

    1. Thanks, Emily. You’re right about the increased contribution level, but the “A” can stand for both arrangements and accounts. I think accounts sounds snazzier.

      Glad to hear you love your Roth IRAs! I can’t imagine the horror of a non-matched 401(k). My company is pretty great with the our plans, so I count myself lucky.

    1. Thanks for the link Andrew! If the company doesn’t match I’m a bigger fan of the Roth IRA. Regardless, starting early and doing an IRA or 401(k) is incredibly important!

  3. I did temporarily stop my 401k contributions to help save for a down payment for our house, but I am back on board with the 401k now. It really is amazing how quickly the money piles up and there is nothing better than a guaranteed return from company contributions!

    1. It is amazing how quickly it piles up! Feels good to see money being saved for my future.

  4. Great post, Erin. I love how you’re helping millennials (and those Gen Xers and Yers too) understand 401ks and IRAs. People of all ages are intimidated by investing so they keep delaying investing in their 401k, etc and it costs them so much money. Time is your best friend and it kills me to see Millennials choosing not to invest in their 401k to at least get the company match. They have no idea how much money their losing out by doing so. I know investing can be overwhelming and retirement seems so far away, but a big pile of money means you have options. Thanks for being such a strong advocate and excellent example of a Money Smart Millennial.

    1. Thanks, Shannon! I hope my peers take my advice and really understand how big an impact a year can make.

      I really appreciate how supportive you are!

  5. Yea, don’t wait. I skipped my 20s saving money for 30% down on a house, and I am now having to double down to make up what i missed out on. I’m doing ok, but would have been better off just putting minimum down on my house.

    1. It’s great you’re trying to compensate for lost time and at least you’ve started! I really hope some millennials start to understand how important it is to start in your 20s.

  6. Great post Erin! I actually just finished writing a staff post loosely related to excuses we here when it comes to investing. I try to tell people that even if you start small you still need to start. That helps build a discipline that can last a lifetime. Sadly, those excuses go across numerous generations. I know investing can be intimidating, but I find that a little education goes a long way to helping break that down.

  7. I agree — young and poor is the perfect time to stuff a Roth. You’re not paying much in taxes anyway right now and there’s plenty of time for those contributions to grow tax-free.

    1. I’m sure you feel like you’re being bled dry in taxes living in NYC. I know I sure am. State, City and Federal taxes…ugh. I’m a big fan of the Roth too! So glad my company offers a Roth 401(k).

  8. Great post, and I am looking forward to your next ones! This is a topic I’m really interested in, and I definitely think our generation doesn’t know enough about it. The first actual job I had mentioned offering a 401K fleetingly, so it was never explained to me, and my current job doesn’t offer one. I am looking into a Roth IRA, hoping to open one within a month or two. I think it will be exciting to watch it grow throughout the years. I’m trying to read up on investing as much as possible before I open it, though.

    1. Thanks, E.M. You should absolutely open a Roth IRA ASAP. It is truly magical to watch your money grow. Also great to hear you educating yourself about investing, but don’t let it delay you opening it for too long! Be sure to reach out and ask for help if you need it.

  9. Isn’t it amazing the excuses people make not to invest? My favorite was someone along the lines of your excuse number 4. A 40+ year old friend told me that he was ‘too young to worry about that kind of stuff.’ Riiiiiiiiiiiiiiiiiiiiight.

  10. Great breakdown. Very simple and easy to understand. The one thing I will say is that a Traditional IRA has income limits IF you or your spouse participate in an employer plan. So if you contribute to a 401(k), then your ability to deduct contributiona to a Traditional IRA is limited. You can still contribute, but it’s non-deductible.

    1. Thanks, Matt! As a single millennial I usually write in terms of people making contributions without a spouse so it’s a great point to make.

  11. I like to add that if you work in non-profit or in any career where you don’t get a match to your 403b/401k and the brokerage firm is terrible, DON’T start a 401k/403b. Vanguard has handsdown the BEST rates for their IRAs since those other brokerage firms invest in a Vanguard fund. So when you invest with Vanguard, it’s like you cut out the middle man. You can start a traditional IRA with Vanguard if you like the tax deduction or better yet, if you’re in a low income bracket with the non-profit realm like I am in, go for the Roth IRA with Vanguard. I even compared Vanguard to my USAA bank, who does have cheap rates for their IRAs and Vanguard is still cheaper.

  12. You blow my mind every time I read your posts. Simple explanation and humorous pictures, you make it very easy to comprehend. Thanks for sharing your knowledge! I will be coming to you with my questions for sure 🙂

  13. Starting young is great. But you need to be honest when you consider whether to trade a tax break now for a tax break in retirement. Who knows what the future will bring and if you can afford the tax now do it, why have the tax headache in your dotage. The most important thing is to get a decent financial advisor (fee not commission, and certified) or do as much research as you can if your flying solo. The following post develops this further:

    1. Frankly, I think a ROTH 401k (or IRA) almost always makes sense for someone starting young. The odds of a tax break being lower when we hit retirement are pretty slim. I’d also rather just know how much I’m going to have instead of owing hundreds of thousands of dollars back to the government.

  14. I waited a while because I needed every single penny I could get out of my paycheck. But what actually did convince me to finally start contributing was “FREE MONEY!!” If your company matches, then while it will take a little bit out of your paycheck, it also means your company is giving you money! That concept alone convinced me to start.

  15. This post serves as a nice kick to the rear! Retirement accounts arent as complex as people make them out to be. And as with most things finance related, the earlier the better.

  16. Great share…

    I completely agree with you, we should avail an advantage of 401k plan for retirement purposes.

    There is a good way of protecting the safety or value of a 401K plan from losses in the funds.

    That is to have full control of the retirement plan especially on the funds that are being invested.

    These days, there has been an increase in the number of investors or employees who are going for a self directed 401K plan than the other retirement plans.

    Most employees who have a self directed 401K plan are looking for creative ways to generate huge income returns.

    These individuals consider investing in real estate where the value and income ensures profitable returns.

    Although there are still some who intend to invest in non traditional assets such as tax liens, business opportunities, LLCs, private partnerships, trust deeds and mortgages.

    This is only possible when an investor or employee possesses a self directed 401K plan.

    Thanks for the share 🙂

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