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  • Writer's pictureJacob Vernon

The Importance of Saving and Where to Begin

Updated: Jun 22, 2023


A person saving money for the future

How does someone start saving if they've just started their first job?

Generally, most people entering the workforce undersave, whether that be because of high expenses, leisurely spending, or not knowing where to start.


The Value of Starting Early

Comparing who will earn more between two investors who start saving at different times

The chart above illustrates the importance of saving and putting away money early. For example, because Investor 1 started saving ten years before Investor 2, they could invest less and ultimately make more.

Any amount of savings is good when someone starts their career, but knowing where to put those savings is paramount to a person's long-term financial success.


So, where does someone put their savings to invest?

There are two accounts to consider opening, a Roth IRA and Individual Brokerage account.

Roth IRAs are one of the most valuable tools when considering saving. The significant advantage of a Roth IRA is that earnings grow tax-free and can be withdrawn (after age 59 ½ and if the account has been open for at least 5 years) tax-free. However, with most other accounts, even 401ks and Traditional IRAs, taxes are associated with withdrawals. Additionally, Roth IRAs do not force you to take mandatory distributions at a certain age.


So why is it important to start a Roth IRA early?

One of the primary reasons is the limit on contributions. As of 2023, the maximum contribution a person can make a year is $6,500*. Once the deadline to contribute for 2023 has passed, a person cannot contribute for that year, so it is vital to contribute all you can to your Roth IRA each year.

The second is that Roth IRAs restrict contributions if a person’s income is too high. If you believe your future income will exceed current restrictions, then you may have a limited number of years to contribute.

If someone is a single filer and their income for 2023 is $153,000 or higher, they would be unable to contribute to their Roth IRA. Joint filers with a combined income of $228,000 or higher are also unable to contribute. While people in these income brackets may be restricted from contributing, they can keep their current Roth IRA and continue investing it.


Why is an Individual Brokerage account beneficial?

An Individual Brokerage account is beneficial because it gives people greater flexibility with their money. For example, a person can withdraw their money anytime without penalties. However, while this is beneficial, there are some drawbacks. For example, a person's investment earnings would be taxed at the short-term or long-term rate.

Ultimately, deciding which account to open is determined by a person's circumstances and what they feel is right for them at the given time.


Key Facts on Roth IRAs:

  • Money in a Roth IRA grows tax-free.

  • All earnings and contributions can be taken out tax-free after age 59 1/2 and if the account has been open for more than five years (subject to some exceptions like a first home purchase and qualified education expenses). Contribution limit of $6,500 in 2023 (the last day to contribute for 2023 is April 18, 2024).

  • Contributions have to be qualified income and are made with after-tax income. To be able to contribute, your income has to be under $153,000 if filling as a single person and under $228,000 if filling jointly.

  • You can withdraw contributions to your Roth IRA anytime, tax-free and penalty-free. You may have to pay taxes and penalties on earnings. (Contributions are the money you deposit into an IRA. Earnings are your profits)*

  • Unlike Traditional IRAs, Roth IRAs do not offer tax deductions on contributions.

  • You can leave amounts in your Roth IRA as long as you live.

For more information on Roth IRAs or how to open one, contact Vernon Management Group at rustyvernon@vernonmanagement.com.


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This is not tax advice. Please consult your tax advisor before making any tax decisions

*Some exceptions apply to contribution limits. Seek the IRS’s website or your investment professional for more details.

*Please consult your tax advisor before you make decisions that involve tax laws

Sources:

Federal Reserve Bank of St. Louis

Jacob Vernon an Investment Advisor Representative at Vernon Management Group


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