It all started innocently enough: My friend and I were on a socially distanced afternoon walk, enjoying the early spring sun, when she uttered two words that made my heart skip a beat — retirement savings. Gulp.
Rather than panic, I listened intently to her predicament. She, too, is a single mom trying to swing college tuition for her kids, and identifies as someone who let retirement planning slide. Upon seeking professional input, my friend quickly realized paying for college was the least of her worries. As to her financial planner’s advice? Focus on your own long-term financial future.
Driving home, I decided to act rather than wallow: I’m 46 years old, and I’m trading in a whole bunch of shame about my non-existent retirement savings and swapping it for an IRA.
The short story? I decided to use my federal tax refund to open an Individual Retirement Account, which — for those who are unfamiliar — is a type of tax-advantaged account to save for retirement that is separate from a workplace plan; investments like annuities, mutual funds, stocks, and bonds might be available through an IRA.
For five years, I used every penny I earned as a freelance writer to pay the mortgage and put food on the table for me and my two teenagers. It made sense that I dragged my feet when it came to retirement planning, let alone retirement savings: There was nothing leftover, so I considered the issue moot. Now, as if on cue, I’ve discovered the silver lining of getting a late start.
As a newbie to the full-time working world, I plan to be in a higher tax bracket when I retire than I am now, which makes the Roth IRA a perfect fit for me. Suffice it to say I’m finally building for my future, and I’m not even starting (entirely) from scratch.
I hadn’t made much progress on saving for retirement up till now
A long time ago — more than two decades! — I spent a total of seven years making modest contributions to a pair of employer-sponsored annuity savings accounts and a 401(k) plan that my then-employer matched. When I took a six-year break from the workforce (to raise my kids), I had a spouse whose generous pension positioned both of us to be on track for retirement; when I returned to work as a freelancer (read: no benefits, and definitely no matching contributions), I was concurrently navigating the divorce process, and saving money for retirement was possibly the furthest thing from my mind.
As part of my subsequent financial settlement, I was awarded half of my ex-husband’s pension which — upon his retirement as a public school teacher — I will begin collecting at the adjusted rate of 50% of its worth at the time of our divorce. Will these funds materialize? I hope so. Is my ex-husband also going to turn around and receive 50% of my aforementioned if not paltry retirement savings? Why yes he is. The very system seems designed to disadvantage women who take time off to raise children, or who choose not to work at all, let alone married women who make these choices then choose to leave their marriages. Alas, that is an essay for another day.
For this rookie to the retirement savings and planning game, an IRA felt like a relatively low-risk first step toward accruing retirement security as a newly single adult. I did my fair share of homework and scrutinized the benefits of a traditional IRA against those of a Roth IRA (both of which are used to save for retirement, the main difference being how and when the potential tax benefits come into play).
With a traditional IRA, one contributes pre-tax dollars, invested money grows tax-deferred, and withdrawals are taxed as current income after age 59 1/2 (the age at which one can begin penalty-free distributions); annual contributions are capped at $6,000 for 2021 (individuals aged 50+ can contribute an additional $1,000) and the required minimum distribution age is 72.
With a Roth IRA, one contributes after-tax dollars, invested money grows tax-free, and tax- and penalty-free withdrawals are generally allowed after age 59 1/2 (with no required minimum distribution age). Annual contributions are capped at the same rate as the traditional IRA: $6,000 for 2021, plus an additional $1,000 for individuals over the age of 50.
A third category, the Rollover IRA (an account that allows one to move funds from an employer-sponsored retirement plan into an IRA) was not a viable option for me since I wanted a fresh start (meaning no ex-husband in sight) for this savings plan! For me, a Roth made the most sense because of my income expectations.
Am I on track to retire at age 65? Nah, and quite honestly, I’m not worried. But I am breathing a huge sigh of relief at the fact that I can quit worrying about not having any savings and instead focus on nurturing my fledgling nest egg — thanks to a single, simple step to get started.
Now that I’m positioned to save for retirement, in an account that belongs to me and only me, I’m uncovering the added perks of a Roth IRA. My career as a freelance writer and book author is (hopefully) just taking off, which means my after-tax contributions are being taxed at a far lower rate than were I to contribute pre-tax dollars to a traditional IRA and pay taxes at my tax bracket upon retirement. This was likely the most compelling factor in my decision between the two.
Is a Roth IRA the right choice for everyone? Not necessarily. In 2021, the income eligibility phase-out ranges are $125,000 to $140,000 for a single filer, and $198,000 to $208,000 if married filing jointly. There are no income limits for contributing to a traditional IRA, save for those used to determine whether or not a contribution is deductible. That said, both IRAs are popular for a reason: They are easy to open with an online broker — I went with TIAA, which holds my aforementioned 401(k) — and with the right set of investments held over many years I hope to see average returns of around 10%.
Bottom line: I’ve decided to leave the embarrassed girl behind — the one who convinced herself she was waaaaay more than a day late and a dollar short of reaching her retirement goals — and give myself an audible woot-woot! for getting started. No more guilt over here about not having a fiscally responsible plan for my future — which isn’t to suggest I won’t be beating myself up, just a little, about how little I’ve got stashed away for my kids’ college tuition. But I’ll save that worry for next year …
Subscribe to Business Insider’s Financial Insights Newsletter
This Business Insider article was legally licensed by AdvisorStream