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Just landed your first job? Here's where you should put your money
Investing in a 401(k) or IRA early on can help you save dramatically more for retirement.
Huge congratulations are in order: you graduated college and just scored your first job in the real world — and you did this all during a global pandemic.
While you may feel eager to spend your newfound income, it's crucial that you take advantage of your age and put some of that money toward retirement. Your nonworking years may feel incredibly far away, but the earlier you start building a nest egg the bigger it can become.
"Young savers are the best savers because they’ve got the one thing every other saver wants: time," says Andrew Meadows of Ubiquity Retirement + Savings, a 401(k) provider for small businesses. Thanks to compound interest, which essentially pays interest on top of interest, the money you stash away today will grow exponentially.
"Think of compound interest like a snowball," Meadows adds. "The more money you have, the more it can grow over time."
Here's where you should prioritize putting your income from your first job to ensure you're saving enough for the future.
Your employer's sponsored 401(k) plan
Many companies offer their employees a 401(k) retirement plan. These retirement savings accounts offer opportunities for you to put money into investments that you’d otherwise likely not have access to because some investments are made only for 401(k) plans, Meadows explains.
The money you contribute to your 401(k) is not taxed, meaning that contributing to your 401(k) reduces your taxable income and can lower your overall tax bill. Roth 401(k)s are another option that is funded with after-tax dollars.
401(k)s are only available through an employer and some companies will even offer a match if you contribute a certain amount into your 401(k). A company match is additional money put into your 401(k) by your employer that allows you to increase your savings.
"For example, if your company matches up to 4% [of your salary] and you contribute 4%, you’re doubling what you’re able to put away," Meadows says.
The IRS sets contribution limits each year and in 2021, the most workers can contribute to their 401(k) is $19,500. For those 50 or older, the maximum contribution limit increases to $26,000 (thanks to $6,500 catch-up contributions). Employer contributions are added onto these specific limits.
If your employer offers matching contributions, make sure you prioritize putting your money toward it. Otherwise, that's free money left on the table. If you can't afford to meet the match right away, inch your way closer each year by upping your contribution by 1%.
Your own Individual Retirement Account (IRA account)
If your new employer doesn’t offer you a 401(k) plan, you can still save for retirement by opening your own Individual Retirement Account, more commonly known as an IRA account. Unlike a 401(k), you don't need an employer to open an IRA account.
IRAs also offer a range of investments for your money, such as individual stocks, bonds, index funds, mutual funds and CDs. They are a good option for those that don't have access to a 401(k) or if you want to supplement your 401(k) with another retirement account. Just like with a 401(k), you can set up automatic contributions into your IRA from a checking or savings account.
You can find IRA accounts offered through national banks, investment firms, online brokers and robo-advisors. You'll most likely see both traditional IRAs and Roth IRAs offered. While the two types of IRA accounts have the same contribution limits — in 2021, up to $6,000 if under 50 and $7,000 if 50 or older — they offer different tax benefits.
Similar to a 401(k), a traditional IRA can reduce your taxable income, meaning you owe the government a bit less every year you contribute.
Select reviewed and compared over 20 different traditional IRA accounts to determine the best ones for all sorts of investors. (See our methodology for more information on how we choose the best traditional IRAs.) When shopping around an IRA, choose an account that has no minimum deposits, offers commission-free trading and provides a variety of investment options.
Fidelity Investments IRA ranked the best for beginner investors because of its $0 minimum deposit, commission-free trading and an abundance of educational tools and resources to help you get started investing. Fidelity even offers its own robo-advisor, Fidelity Go, if you want to be more hands off with your investments.
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but minimum $10 balance for robo-advisor to start investing. Minimum $25,000 balance for Fidelity Personalized Planning & Advice
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (after, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity Personalized Planning & Advice has a 0.50% advisory fee
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Robo-advisor: Fidelity Go® and Fidelity® Personalized Planning & Advice IRA: Fidelity Investments Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
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Young investors, Meadows notes, should also realize that they are starting down a road of creating strong financial relationships.
For this reason, he suggests looking into starting with an IRA account at your bank to show loyalty. "[Doing so] could help you down the road when you’re looking for a loan or other banking support," he says.
To determine which individual retirement accounts (IRAs) are the best for investors, Select analyzed and compared traditional IRAs offered by national banks, investment firms, online brokers and robo-advisors. We narrowed down our ranking by only considering those that offer commission-free trading of stocks and ETFs, as well as a variety of investment options so you can best maximize your retirement savings.
We also compared each IRA on the following features:
- $0 minimum deposit: All of the IRA on our ranking don't have minimum deposit requirements.
- Low fees: We considered each IRA's fees, commission trading fees and transaction fees.
- Bonus offered: Some IRA offer promotions for new account users.
- Variety of investment options: The more diversified your portfolio, the better. We made sure our top picks offer investments in stocks, bonds, mutual finds, CDs and ETFs. Most also offer options trading.
- A hub of educational resources: We opted for IRA with an online resource hub or advice center to help you educate yourself about retirement accounts and investing.
- Ease-of-use: Whether accessing your IRA via your laptop at home or on your smartphone while on the go, it's important to have an easy user experience. We noted when investment platform excelled in usability.
- Customer support: Every IRA on our list provides customer service available via telephone, email or secure online messaging.
After reviewing the above features, we sorted our recommendations by what type of investor is a best fit, from beginners and hands-off investors, to the more experienced and hands-on investors.
Your earnings in an IRA depend on any associated fees, the contributions you make to your account and the fluctuations of the market.