Personal Finance & Money Asked on August 7, 2021
My friend in the US (I don’t live there permanently) has a Youth who has started work as a teen while at school/college ("at Starbucks" type of thing) and we were discussing the various ways such a Youth should begin Saving For Retirement. What I mean is in the government sanctioned tax-advantaged manner(s) available in that country.
I actually (A) know nothing about this (I hear the usual terms "401" etc), (B) I trust this list more than Friend 🙂 and (C) surprisingly .. I really couldn’t find a concise, appropriate, summary of this on the internet. (If I’m wrong, bad me.) (I think a lot of the explanations for US folks just "assume obvious stuff US folks would know" if you see what I mean.)
Situation,
What is it you have to "do" in Usa to "start one of the retirement systems"?
Special circumstance,
And one from me
Retirement accounts have the major advantage that changing one's investments within the account (over the coming decades) does not incur capital gains tax along the way. This is a separate, underappreciated benefit from the famous benefits of retirement accounts such as pre-tax contributions or no-tax withdrawal in retirement.
If the employer offers no plan, then IRA is the choice.
With a Roth IRA, all contributions may be withdrawn without penalty at any time. Only the gains/dividends are restricted or penalized if withdrawn. This is especially relevant if potentially moving countries and moving money.
Choosing a brokerage or mutual fund family, several choices offer no fee accounts and low-fee index funds.
Contributing at most $100/week is $5200/year which is safely under the IRA contribution limit of $6000/year.
Low-income workers/households should not neglect the Saver's Credit, which gives cash back on their income taxes as a reward for retirement savings.
Correct answer by Orange Coast- reinstate Monica on August 7, 2021
Common tax-deferred vehicles include:
The employee benefit plans are offered by the employer. The youth should ask the HR department if they are eligible. In the event they separate from the employer, they can stay in the plan as long as the employer lets them; and if not, or at their discretion, can create a "rollover IRA" (similar to a Traditional IRA) at a financial institution.
Traditional IRA and Roth IRA are set up at a financial institution by the youth. Traditional IRA generally reduces income tax in the year of contribution, and is taxed as income when distributed. After the age of 70.5, there is a required minimum distribution based on life expectancy.
Once the total income of the year is assessed, it is possible the contributions to a traditional IRA do not reduce tax in the year of contribution (it phases out for high income earners; and the limits are tighter if the taxpayer is eligible for a 401k or 403b from their employer). The contributions shouldn't be taxed when ultimately withdrawn, but this confounds bookkeeping until retirement age.
Roth IRA distributions are not taxed when taken in retirement age, or under certain pre-retirement scenarios (illness, first home purchase).
Buying and holding securities has certain advantages based on current tax law, though since the federal income tax was established in 1913 the rates and rules have both increased and decreased every few years. For several periods, capital gains have been treated as ordinary income. Advantages in the current rules compared to IRAs include exact control of the year of incurring the gains; step up in basis in estate tax; and capturing losses that currently can be used to offset some ordinary income. A disadvantage is in the event of a corporate merger, the owner may lose control of the year of taxation.
The rough heuristic for an 18 year old should be:
Whether Roth or IRA are prioritized in the second step can change closer to retirement age and is a conditional function on the marginal income tax rate in the current year, the best guess of the marginal income tax rate in retirement, and at the point of forced RMD at age 70.5.
Letting a parent monitor an account. The youth can execute a power of attorney letting someone else monitor and control investments on their behalf. Well established financial institutions should have a form for this, for example.
South Korea and Social Security You didn't ask about Social Security directly, but did ask about automatic government plan participation. All regular US employees participate in Social Security with contributions automatically deducted by their employers. South Korea has a similar system, and there happens to be a reciprocal treaty between the nations where credits in one system can be used in the other for full eligibility, in the event the individual does not have enough in the place where they retire.
Answered by user662852 on August 7, 2021
How do you mechanically do this (in the US?) Is it like a government function or something and the money goes through some gov't department?
That's the mandatory Social Security taxes, which you are not referring to.
Do you basically open a brokerage account and tick a box "401" (or one of those abbreviations)?
That's exactly how you do it, by opening a Roth or traditional IRA at a brokerage (Vanguard, Fidelity, Schwab, etc, etc).
Note, though, that there are two methods (the employer-sponsored 401(k), and the employee-driven IRA), and within those, there are two types (traditional pre-tax contributions, and Roth after-tax contributions).
Thus, I agree with Orange County: she should invest some savings in a Roth IRA (or possibly 401k if her employer offers it, and contributes extra); the money will not only grow tax-free, but future withdrawals will be tax free.
there is some chance that Youth ... will suddenly leave the USA, move to Korea or something and never return
EDIT: paragraph removed because it's not correct. https://www.schwab.com/ira/roth-ira/withdrawal-rules
Answered by RonJohn on August 7, 2021
For investing for retirement, there are four main types of accounts:
If you have an employer plan available to you where your employer is matching some of your contributions, that is the best place to start. Your investment grows immediately as you put money in, due to the match. It is essentially extra money that your employer is giving you. Even a seemingly small match is worth it.
For a young person who wants to save for retirement and does not have an employer-matched plan available, a Roth IRA is what I would recommend. Because they currently have a low income/tax rate, they would not benefit much from the tax deduction of the 401(k) or the Traditional IRA; it costs them less to participate in the Roth than it does a high income individual. And once you pay the tax, you are done; the money grows in the account tax-free and no taxes are due when you take it out down the road.
Answered by Ben Miller - Remember Monica on August 7, 2021
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