Start saving early.
Beginning to save for retirement in your 20s is one of the best financial decisions you can make. You can benefit from decades of compounded growth, capture valuable employer contributions and save money on your tax bill all at the same time.
Get a 401(k) match.
Getting an employer contribution is one of the fastest ways to grow your nest egg. The most common 401(k) match is 50 cents for each dollar saved up to 6 percent of pay. For someone earning $40,000 per year, this 401(k) match could be worth as much as $1,200.
Set up automatic withholding.
A major perk of 401(k) accounts is that the money is withheld from your paycheck, and you never get a chance to spend it. If you don't have access to a 401(k) at work, consider setting up a direct deposit to an individual retirement account or taxable account to make saving for retirement effortless.
Reduce your tax bill.
Contributing to a traditional 401(k) or IRA reduces your income tax bill. If you save $5,000 in a retirement account, you will save $750 on your federal income tax bill if you are in the 15 percent tax bracket and $1,250 if you are in the 25 percent bracket. Income tax won't be due until you withdraw money from the account.
Consider a Roth account.
Roth 401(k)s and Roth IRAs allow you to pay income tax on your contributions at your current tax rate, which can be especially beneficial to young and low-income savers who expect to earn more later in their career. Withdrawals from the account will then be tax-free in retirement.
Claim the saver's credit.
Retirement savers whose adjusted gross income is less than $30,000 in 2014 are eligible for a tax credit worth 50, 20 or 10 percent of the amount contributed to a 401(k) or IRA up to $2,000. Investors with the lowest incomes are eligible for the biggest tax credit for their retirement saving.
High investment fees can significantly erode your investment growth, especially over a 30-year career. Compare the expense ratios of similar funds and aim to choose the most inexpensive funds that meets your investment needs.
Avoid early withdrawals.
Distributions from traditional 401(k)s and IRAs before age 59 1/2 typically trigger a 10 percent early withdrawal penalty. If you take the money out before retirement, you also miss the tax-deferred investment growth. Keep an emergency fund that's separate from your retirement account so that your nest egg can continue to grow.
Think of your future self.
Picture what your life might be like when you are 65. Think about how you would spend your time if you no longer needed to work for a living. Saving money gives you options that people worried about making their next mortgage payment don't have.
Watch your savings compound.
Beginning to save for retirement in your 20s gives your money the longest possible amount of time to grow. The more you save, the more interest your investments will generate. When that interest is added to the principal, your savings will increase exponentially. Instead of having to work for your money, the money you invest will work for you.
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