As college graduates embark on their professional careers, they should consider the following savings strategies to help prepare them for a sound financial future. Like most things in life, the earlier you start planning, the more likely you will achieve your goals.
Employer-Sponsored Savings Plans
While retirement may seem like a long way off for recent college grads, initial entry into the workforce is an ideal time to take advantage of compounding interest. Even with a modest first-year salary, recent grads should not forgo the opportunity and ease with which they may begin saving through employer-sponsored 401(k) or Roth 401(k) retirement plans.
For 2024, the maximum amount an employee may contribute to either plan is $23,000. Both may also be supplemented with an employer “match,” which can be compared to free money. For example, if you contribute 3 percent of your salary to a workplace plan in 2024 and receive a 3 percent company match, you will yield 6 percent of savings for the future.
In contrasting these plans, the main difference comes down to taxes. With traditional 401(k)s, contributions are made via salary deferral with pre-tax dollars and allowed to grow tax-deferred until account owners reach retirement age (59½) when distributions are treated as taxable income. By contrast, annual contributions to Roth 401(k)s are made with after-tax dollars that grow tax-free and can be withdrawn free of tax at retirement age.
Individual Retirement Savings
You are not out of luck if your employer does not offer a retirement savings plan. You can establish an Individual Retirement Account (IRA) and make annual pre-tax contributions of up to $7,000 in 2024. Doing so will enable you to defer taxes on earnings, including income and gains. Withdrawals taken in retirement, including those required after age 73 for tax years 2024 through 2032, would be taxed as ordinary income.
Alternatively, you may establish a Roth IRA with an after-tax contribution of up to $7,000 in 2024. After turning 59½ and owning the Roth IRA account for at least five years, your withdrawals will be tax-free. However, withdrawals taken before this age generally are subject to tax and a potential 10 percent penalty, depending on the reason for the withdrawal.
Healthcare Savings Accounts
If you have a high deductible health plan with equally high out-of-pocket costs, your employer may offer a health savings account (HAS) akin to a personal bank account funded with pre-tax dollars to pay for qualifying medical expenses today and in the future. However, unlike the money you hold in a regular bank account, the funds saved in an HSA earn tax-free interest. Unused account balances roll over from one year to the next, allowing you to accumulate significant savings that you may choose to invest in the equity markets to yield potentially higher returns. For 2024, the maximum amount individuals may contribute to an HSA via salary deferral is $3,200.
Taxable Investment Accounts
Tax-advantaged retirement accounts are critical to achieving long-term financial plans, but they come with many limitations and restrictions. For greater flexibility and cash flow before you reach retirement age, you may also consider investing in the markets through a traditional investment account, for which you may be liable for taxes on market gains and investment income. These types of investments, also referred to as brokerage accounts, lack the contribution limits and distribution requirements of retirement savings plans, allowing account owners to withdraw their money at any time, for any reason, without penalty (but not without tax liabilities).
Working with experienced advisors, you can establish a diversified portfolio designed to
reap the rewards of strong market performance while aiming to minimize risk based on your unique needs and goals. The taxes you would pay on capital gains in a given year may be less than those imposed on ordinary income, and you may even be able to use a capital loss to reduce your tax liabilities for those years.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Brendan T. Hayes is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the preceding material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Changes in tax laws may occur at any time and could have a substantial impact on each person’s situation.
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Posted on May 14, 2024