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What I wish I did in graduate school for my personal finance strategy involves obtaining a Roth IRA! Not getting a Roth IRA sooner was a blunder that you should avoid. For context, when I am writing this post, it has been almost 5 years since I graduated with a Ph.D.! I am still in my early 30s but retirement planning can start way sooner, in your 20s.

Unfortunately, I did not learn about various retirement vehicles until after leaving academia and joining the workforce so better late than never! But I am hoping this article can help someone in their early 20s get started even if it means that they just learn about the right terms to Google and go from there! Just get started with this information that I am sharing from my own learning and you will be in a better position financially than a lot of us who learned it much later.

Retirement planning is crucial for every individual, and one of the most popular options for retirement savings in the United States is an Individual Retirement Account (IRA). There are two types of IRAs: Roth IRA and traditional IRA. Both of these accounts have specific tax advantages and eligibility criteria. You can have both of these types of accounts through an asset management company such as Fidelity which is what I use (link to open Roth IRA) but there are other ways.

Roth IRA: Contribute after-tax money to this account for personal finance strategy leveraging tax-free growth

A Roth IRA is a retirement savings account that allows individuals to contribute after-tax income. The earnings from investments made in this account grow tax-free, and withdrawals in retirement are also tax-free. There are no mandatory withdrawals, and contributions can continue to be made as long as the account holder has earned income.

The eligibility to contribute to a Roth IRA is determined by the modified adjusted gross income (MAGI) and tax-filing status. For 2023, the contribution limit for a Roth IRA is $6,500 for individuals under 50 years old and $7,500 for those 50 years old and above. More on this below but let’s quickly think about what you do with the money you contribute to such an account.

What do you do with the money you contribute towards these various retirement accounts?

Quick Answer: You invest it keeping long-term growth in mind

If you are unsure of how to invest the money, there is much you can read online and/or get a financial advisor who can help you. You want your money to grow over the long term. Typically, the advice is to invest pretty aggressively in your 20s and 30s and then go towards less risky investments when you are older.

Use your own judgment and risk profile to determine what you would like to invest in. Personally, I like ETFs, mutual funds, and stocks that pay dividends. In short, ETFs and mutual funds that pay dividends are probably top favorites.

This is purely a personal blog based on personal experience and finance strategy, and not a substitute for professional financial advice. Types of accounts and/or stock symbols that may be shared are all purely examples, no direct instruction or advice is given.

3 example stocks that pay dividends

Traditional IRA: Contribute pre-tax money to this account for personal finance strategy leveraging tax-deferred growth

A traditional IRA is a retirement savings account that allows individuals to contribute pre-tax income. The earnings from investments made in this account grow tax-deferred, and withdrawals in retirement are taxed as regular income. There are mandatory withdrawals starting at the age of 72, and contributions can be made until the age of 70 ½. Please verify these numbers yourself.

The eligibility to contribute to a traditional IRA is determined by the age of the account holder and whether they or their spouse have a retirement plan at work. For 2023, the contribution limit for a traditional IRA is $6,500 for individuals under 50 years old and $7,500 for those 50 years old and above.

TLDR: Total contributions to both types of IRA have to be up to $6500 this year. It is not 6500 in each type of account, but 6500 total in both. But note that you can roll the money over into these accounts from a previous 401K (for example) without affecting the contribution limit of that year. Please verify this information yourself.

401(k): Contribute pre-tax and/or after-tax money to this account

A 401(k) is a retirement savings plan offered by employers. Employees can contribute a portion of their pre-tax income to the plan, and the employer may also make contributions. Employer match can be something like up to 5% of your salary given that you contribute up to that limit yourself. Depending on your salary or income, you should contribute up to the limit set that year which is $22,500 in 2023. Then whatever your employer matches is extra money on top of that which will accumulate over time.

The earnings from investments made in this account grow tax-deferred, and withdrawals in retirement are taxed as regular income. There are mandatory withdrawals starting at age 72.

A Roth 401K allows after-tax contributions. If this option is available, you may want to do this as well. The total limit for both types of 401K contributions, pre-tax or after-tax (regular or Roth) is still $22, 500. So, for example, you could break it up like $10,500 pre-tax and $12,000 post-tax contributions.

The contribution limit for a 401(k) in 2023 is $22,500 for individuals under 50 years old and $27,000 for those 50 years old and above. Check these numbers yourself by Google searching for the correct year.

Total contributions to both types of 401K (regular and Roth) have to be up to $22500 this year. It is not 22500 for each type of account, but 22500 total in both. But note that you can roll the money over into these accounts from a previous 401K (for example) without affecting the contribution limit of that year. Please verify this information yourself.

Comparison between Roth IRA, Traditional IRA, and 401K

The main difference between a Roth IRA and a traditional IRA is the tax treatment. Roth IRA contributions are made with after-tax income, while traditional IRA contributions are made with pre-tax income. Roth IRA withdrawals in retirement are tax-free, while traditional IRA withdrawals are taxed as regular income.

The main difference between an IRA and a 401(k) is the source of contributions. IRAs are individual accounts, while 401(k)s are employer-sponsored plans. The contribution limits for a 401(k) are much higher than those for an IRA, making it a more attractive option for those who can afford to contribute more.

Contributing to all three types of accounts within their respective contribution limits can give you flexibility and a diversity of tax advantages. Why do it only one way when you can cover yourself in more than one way?

If you can, max out your 401K contribution of 22500 and your IRA contribution of 6500.

To contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 in 2023. If married and filing jointly, your joint MAGI must be under $228,000 in 2023. The article linked here for the MAGI will help you calculate it for yourself and also to figure out how to contribute to IRAs if your income is close to or over that limit. Do your due diligence on this as my understanding is that there is still a way forward if you make too much money.

Rolling over your 401K money into an IRA when you leave the job

Since the 401K is associated with your employer, it is a good idea to also have an IRA or both the traditional and Roth IRA as well. There are benefits to this.

First of all, if you leave your job you can roll over your 401K money and employer-match money to your IRA(s). The pre-tax part of the 401K money can go into a Traditional IRA (or a Rollover IRA which is basically like a traditional IRA) and the post-tax part (if you have after-tax contributions) can go into a Roth IRA if you made contributions to a Roth 401K.

Personally, I have only ever contributed pre-tax money to a 401K so to date, I don’t have a Roth 401K but I recently became aware that this may be an option. See this article for more information on this:

• A Roth 401(k) can be rolled over to a new or existing Roth IRA or Roth 401(k).
• As a rule, transferring to a Roth IRA is the most desirable option because it facilitates a wider range of investment options.

What I wish I had done in graduate school for my personal finance strategy

TLDR: Not getting a Roth IRA sooner was a blunder

If you can contribute more than $22,500 in the year 2023, for example, to eligible retirement accounts, then why not? Max out your Roth IRA contribution as well.

In fact, this is something I wish I had done in college and graduate school when I did not have benefits associated with my work like a 401K. I contributed nothing towards retirement accounts in all those years when I could have been contributing to a Roth IRA.

Roth IRA does not require having a job with benefits like a 401K so you can do this completely independent of employer benefits and let your earned income grow tax-free which is my favorite personal finance strategy.

And remember the point is to contribute to these retirement accounts, whatever you have access to, and then invest the money and it will potentially GROW over time, and in the case of the Roth IRA, your earnings grow TAX-FREE which is HUGE.

The Roth IRA contribution limit is much lower – it is only $6500 this year in 2023. For people with lower incomes such as graduate students, this is perfect. If I had started having this sort of account (totally for free) through something like Fidelity on my own regardless of job then I could have been contributing towards retirement money through this vehicle and compounding that money for much longer. Also, the investments in a Roth IRA grow tax-free and if the investments have dividends, those also grow tax-free. This is what Fidelity says about their Roth IRA option:

But I did not know this in grad school, I only learned about this recently, and hence, sharing it here with you as well.

In conclusion, retirement planning is crucial, and choosing the right account to save for retirement can have a significant impact on an individual’s financial future. Roth IRA and traditional IRA are individual accounts with specific tax advantages and eligibility criteria, while a 401(k) is an employer-sponsored plan with higher contribution limits. It’s important to consult a financial advisor to determine the best retirement savings plan based on individual financial goals and circumstances.

Of course, none of this is official financial advice, just stuff I have applied or wish I had applied sooner to my own personal financial strategy. Here is part of the fine print from Fidelity because I use them (not sponsored).

The fine print from Fidelity

1. For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

2. Clients with $250,000 or more at Fidelity may be eligible for dedicated Fidelity advisor access.

3. No account fees or minimums to open Fidelity retail IRA accounts. Expenses charged by investments (e.g., funds, managed accounts, and certain HSAs), and commissions, interest charges, and other expenses for transactions, may still apply.