​​Ways to start setting aside funds for retirement

If you want to set aside funds for retirement, you have a few options, including high-yield savings accounts to various investment options. When you’re saving for retirement, the government offers tax-advantaged accounts to help you save more. Here is an overview of the types of funds you can use. 

401(k) plans

A 401(k) plan is an employer-sponsored retirement plan. According to the IRS, a 401(k) is a qualified profit-sharing plan. You can contribute a portion of your income to a 401(k) and deduct it from your taxable income for the year, leading to tax savings. In addition, employers can contribute to employees’ accounts. For 2024, you can contribute up to $23,000, including employer and employee contributions.

After contributing to a 401(k), you’ll have the opportunity to invest the funds in a diversified portfolio according to the investment options available from your 401(k) plan administrator. Learn more about 401(k) early withdrawal penalties. 

403(b) plans

If you work for a public school or non-profit organization, you may have access to a 403(b) plan. 

A 403(b) plan is a tax-sheltered annuity plan that is similar to a 401(k) but is a retirement plan offered by public schools, Code Section 501(c)(3) tax-exempt organizations or churches.

Similar to a 401(k) plan, you can make contributions to your 403(b) plan and defer some of your salary with a tax-advantaged account. Like a 401(k), after putting money into the account, you’ll choose from the plan’s investment options to try to maximize growth. 

Traditional IRA

A traditional individual retirement account or IRA is a tax-advantaged retirement account that functions similarly to a 401(k). You can deduct all contributions from your taxable income for the year, potentially reducing your total income taxes. 

IRAs have smaller contribution limits than 401(k)s. For 2024, the maximum combined contribution you can make to all traditional and Roth IRAs is $7,000 or $8,000 if you’re 50 or older. 

The funds you deposit in an IRA can be invested and also grow tax-deferred. Amounts in your traditional IRA, including earnings and gains, are not taxed until you take a withdrawal or distribution from the IRA.

Unlike with a Roth IRA, there are no income limitations to opening a traditional IRA unless you also contribute to a work 401(k). IRAs generally have more investment options than 401(k) plans. Two final considerations relate to withdrawal rules for an IRA. The U.S. government charges a 10% penalty on early withdrawals from a traditional IRA, and a state tax penalty may also apply. In addition, as of changes in the law in 2023, you must start taking withdrawals when you reach age 73.

Roth IRA

A Roth individual retirement account, usually called a Roth IRA, functions differently from a traditional IRA or 401(k). Unlike a traditional IRA, you won’t deduct Roth IRA contributions from your taxable income in the year of the contribution. 

Instead, you’ll pay income tax on the full amount. However, then the funds can grow tax-free. You won’t be required to pay income tax on funds you contributed or earned when you withdraw them as long as the account is at least 5 years old and you’re 59½ or older.

According to the IRS:

• Can contribute to your Roth IRA after you reach age 70 ½ as long as you’re earning income
• Funds stay in your Roth IRA as long as you live
• Must designate account as a Roth IRA during setup
• Different rules for Roth IRA contribution growth 

For 2024, the maximum combined contribution you can make to all traditional and Roth IRAs is $7,000 or $8,000 if you’re 50 or older. 

Unlike a traditional IRA, a Roth IRA doesn’t require minimum distributions. You can pass on a Roth IRA to your heirs. However, Roth IRAs have income maximums. To contribute to a Roth IRA as a single tax filer you must have a modified adjusted gross income (MAGI) of less than $161,000. If you’re married and filing jointly, your joint MAGI cannot be over $240,000.

SIMPLE IRA

A Savings Incentive Match Plan for Employees or SIMPLE IRA allows employees and employers to contribute to traditional IRAs set up for employees. It is a solution for small employers not currently sponsoring a retirement plan such as a 401(k). 

With a SIMPLE IRA, employees can make salary-reduction contributions, and the employer is required to make matching or nonelective contributions. The employee always has 100% ownership in the SIMPLE IRA. An employee cannot contribute more than $16,000 from their salary to a SIMPLE IRA in 2024

According to the IRS, you can take distributions from your IRA, including a SEP-IRA or SIMPLE-IRA, at any time. You don’t need to show financial hardship to take a distribution. You must include a distribution in your taxable income and pay a 10% penalty if you’re under the age of 59 ½.

SEP IRA

A Simplified Employee Pension IRA or SEP IRA is a traditional IRA for self-employed individuals and business owners. Like a traditional IRA, SEP IRA contributions are tax-deductible. Investments grow tax-deferred until retirement when distributions are taxed as income. If you’re a small business owner or self-employed, you can contribute to a SEP IRA.

As a business owner, you can set up a SEP IRA for your employees and yourself. You can contribute whichever is less: 25% of the employee’s total compensation or a maximum of $69,000 for the 2024 tax year. If you’re self-employed or a business owner, your contributions to your own SEP IRA are generally limited to 20% of your net income.

Investments

In addition to tax-advantaged accounts, if you want to help build additional wealth, you can open a brokerage account for investments. Whether you deposit retirement funds into a 401(k), any type of IRA, or a brokerage account, experts suggest that you invest the funds using a risk-balanced investment strategy according to when you plan to retire. 

A simple place to start for investment is an index fund that tracks the S&P 500, an index of about 500 of America’s top companies. As of the end of February 2024, the average yearly return of the S&P 500 has been 11.3% over the last 50 years. These types of funds are highly diversified, which helps reduce your risk, and tend to have low fees. However, past performance is no guarantee of future success.

Other investments for retirement can include:

• Stocks
• Bonds
• Real estate investment trusts (REITs)
• Exchange-traded funds (ETFs)
• Mutual funds
• Alternative asset classes like precious metals and oil
• Cash in a high-yield savings account

MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

Tips when starting a retirement fund

When starting a retirement fund, basic principles apply, including investing consistently and diversifying your portfolio according to risk. 

Assess your current lifestyle

Your current lifestyle helps give you insight into your future retirement needs. Looking at your lifestyle and retirement goals can be an important first step in retirement planning. According to the 70-80% spending rule, you’ll need 70% to 80% of your current monthly expenditures to maintain a similar lifestyle in retirement. 

Your actual financial needs can vary widely based on what you plan to do in retirement and other factors, such as whether you’ve paid off a mortgage on your home or face increasing costs for rent. Your financial needs could be as little as 54% or as high as 87%. If you plan to buy a vacation home, take round-the-world trips, or otherwise change your lifestyle, your costs for living could be higher. 

Start saving early and start small

In the case of retirement savings, time is one of your greatest assets. Small regular contributions over decades can add up. For example, if you were to start investing a couple hundred dollars a month at age 18, it could add up significantly by the time you reach retirement. 

For example, $500 a month invested for 40 years with an average annual return of 7% will be over $1.2 million. If after 20 years you increase the savings to $2,000 a month, that figure could become nearly $2 million. 

Automate your savings

Many financial experts suggest paying yourself first. One way to do this is to automate your savings. For example, you could set up an automatic transfer of $500 or $1,000 a month into a 401(k), IRA, or brokerage account to take advantage of regular contributions. 

Take advantage of employer-matching contributions

If you aren’t maximizing employer-matching contributions, you’re leaving money on the table. For example, if your employer offers a 100% match on up to 6% of your salary, if you’re not contributing 6% of your salary to a 401(k) or other employer-sponsored retirement program, you’re leaving that income in your employer’s pocket.

If you make $100,000 a year, that’s $6,000 in retirement savings you’re leaving behind. If you don’t know how much your employer will match, speak to your company’s HR department or plan administrator and make sure you’re hitting those contributions. 

Pay off your debt 

High interest debt can cost a lot in the long term. Even lower interest debt like a mortgage can be a financial strain after you retire. Prepare for retirement by working to pay off all debt as quickly as possible. Prioritize credit cards and other high-interest debt first. Then, you can consider making biweekly mortgage payments or a principal-only payment to pay off your mortgage faster and save on interest payments. 

Determine your risk tolerance level

Risk tolerance, as the name implies, is how much you don’t mind taking risks in your long-term investments. Generally, higher-risk investments also have the potential for higher returns and bigger losses. When building a retirement fund, it’s essential to look at your personality, overall risk tolerance, and investment timeline for retirement to choose an appropriate portfolio. 

You can speak with a financial advisor or research common asset allocations from Charles Schwab, Vanguard or other major investment banks to determine your individual needs. 

Diversify your investments

Diversification is the cornerstone of any investment strategy. The old saying, “don’t put all your eggs in one basket” holds true for investments. Consider various asset classes and diversify across risk and asset classes to maintain a balanced portfolio. 

Final Tips on Retirement Savings

Should you save for retirement? Yes! Even small monthly contributions over years can add up to a significant financial cushion. Building your retirement portfolio can help prepare for your golden years or offer opportunities for early retirement. Find more tips to start saving for retirement and learn to maximize your savings this year. You can learn more about calculating your liquidity needs to create a personalized investment portfolio for your retirement goals. 

FAQ 

If you’re asking how do I access my 401(k) now? – you’ve come to the right place. Take a look at this guide to be in the know!

How early 401(k) withdrawal works

You can technically withdraw funds from your 401(k) anytime. You don’t have to wait until you turn 59½, but you will have to pay taxes and penalty fees on your early withdrawals. You will have to pay 10% in penalties on the withdrawal. For instance, if someone takes $5,000 out of their 401(k) before reaching the minimum age, that person is charged a $500 penalty fee. The fee does not include the taxes you must pay if your plan has pretax contributions.

While most early withdrawals result in penalty fees, several exceptions exist. You won’t have to pay the penalty fee if you use the funds for these expenses:

• You or your spouse gave birth to a child or adopted a child that year only and up to $5,000
• You left your job at 55 years or older — 50 or older if you worked for the federal government
• You have a disability
• You can buy a home with penalty-free early withdrawals if you are a first-time homebuyer or have not owned a home for two years ($10,000 limit) 
• College tuition and other qualifying higher education expenses

Why would you want to access your 401(k) funds now?

Some people tap into their 401(k) accounts early because they don’t want to wait to accumulate additional funds. If a great house hits the market and you don’t have enough money for a down payment, your 401(k) account’s funds may be enough to cover the difference. A 401(k) account can also provide stability for consumers who lose their jobs and still need a way to cover living expenses. 

The extra cushion can help you seek a better job instead of rushing to the first opportunity that comes your way. While it is ideal to save your 401(k) funds and never touch them until you retire, the cash in your account can help you capitalize on opportunities or protect you from financial uncertainty.

What to consider before cashing out a 401(k)

Aspiring retirees should keep these details in mind before cashing out their 401(k)s. 

1. Understand the penalties

An early withdrawal results in a 10% penalty if you don’t use the funds for a qualifying purchase. Some people may have to withdraw more money than anticipated to balance out the penalty payment and taxes. For example, if you withdraw $5,000, you’ll lose $500 from the penalty, but you do not end up with $4,500. You will have to pay income tax on the $5,000 next year, and that catches some people off guard.

2. Don’t forget to explore other options

It’s easy to withdraw funds from a 401(k), but your retirement savings account shouldn’t be your first choice to cover emergency expenses or adjust to a challenging situation. It’s better to look for alternative income opportunities that provide extra cash when you need it. Building an emergency fund, picking up side hustles, and building your network can add extra layers of protection to your 401(k). 

Some people have to withdraw from their 401(k) accounts, but you should entertain other choices. Even if you must withdraw funds from your 401(k) account, you should explore alternatives in case the problem re-emerges. You can use an early 401(k) withdrawal as a learning experience. That way, you can adjust your financial planning and pursue opportunities to reduce the likelihood of another early withdrawal.

How to cash out a 401(k): 3 ways

People build up their 401(k) accounts knowing they will withdraw from them someday. It’s possible to withdraw funds earlier than expected, and doing so can minimize financial hardships. Here are some of the ways you can cash out on your 401(k) retirement account.

1. Take an early withdrawal

If you are not 59½ older, you will incur a 10% penalty fee for withdrawing from your 401(k). Exemptions exist, but consumers should plan for the penalty. This penalty is on top of your income taxes, which depend on your tax bracket. No matter when you withdraw funds from a 401(k), you will have to pay taxes unless you have a Roth retirement account. 

2. Check for qualifying events

A qualifying event is a purchase or lifestyle status that exempts you from the 10% penalty. Making a down payment for your first home, covering expenses up to a year after you or your spouse gives birth to a child or adopts one, and paying for college tuition can help you escape the early withdrawal penalty.

3. Consider 401(k) loans or lines of credit

Some consumers can borrow lines of credit against their 401(k) accounts instead of incurring early withdrawal penalties. Lines of credit also have interest rates and fees, but you can avoid most of them with on-time payments. A line of credit only accrues interest when you borrow against the credit line. This approach protects your 401(k) funds from penalties and delays your tax payments. Borrowers can replenish the credit line when income improves and expenses become more manageable. 

Who do I contact to cash out my 401(k)?

To access your 401(k) money now, you’ll have to contact your 401(k) plan’s administrator to withdraw funds. Consumers can reach out to human resources from their companies to get more details. Make sure to ask about withdrawal limits and any penalties you might incur as a result of getting your 401(k) now rather than during retirement.

Give Yourself More Choices For A Smoother Retirement

It’s OK to withdraw from a 401(k) account early, but you might risk penalties for non-qualifying purchases and events. Knowing you can withdraw from your 401(k) can relieve some day-to-day stress, but it’s better to use other income streams and build an emergency fund. 

FAQ

Projections are hypothetical and do not represent tax, investment or other financial advice.

What is a savings calculator?

A savings calculator helps create an action plan to achieve your financial goals. A savings calculator is an online tool that estimates how much savings you can accumulate through regular contributions and earned interest.

Are savings calculators accurate?

Savings calculators estimate how much your money grows over time based on assumptions you make. A savings calculator projects your savings account balance over time based on your initial deposit, the annual percentage rate (APR) earned, how much you expect to contribute each month, and how long you plan to save.  The result changes when you change the variables, such as the initial deposit, monthly contributions, APR, or how many years you plan to save. 

How does a savings calculator work?

With an online savings calculator, you enter your initial deposit, interest rate, monthly savings contributions, and the length of your savings goal. With these inputs, you can see how much money you can save over time. 

Initial deposit

The available money you have saved is your initial deposit. When using a savings account, pay attention to balance requirements. Some savings accounts require a minimum deposit to open. Some banks charge a penalty or lower your interest rate if you don’t keep a minimum balance in your savings account. 

Monthly deposit

Saving money may seem challenging. Even if you can only put aside $5 each month, any amount saved moves you closer to financial goals. The more money you set aside, the easier it is to build up your savings account over time.  You can use a savings calculator to estimate how much you save over time based on your monthly contributions.  

Suppose you want to save money for a down payment on a home. You currently have $10,000 saved in a bank earning 4% per year and plan to save $250 each month for three years. When you drop in your initial deposit, the APR, your estimated monthly contributions, and how many years you plan, the savings calculator estimates you’ll have $20,200 after three years.

Annual interest rate

Most banks, lenders and credit unions pay interest on deposits in certain accounts. Interest rates can vary based on the type of account. You may find online banks that pay higher interest rates than traditional banks. You will likely earn a higher rate with a high-yield savings account, but you may be required to carry a minimum balance in your bank account. 

A simple interest account calculates interest earned only on what you have deposited. Assume you open a savings account with a 4% annual interest rate. If your savings balance is $10,000, you earn $33.33 monthly in interest for a total of $400 for the year. 

A compound interest account computes interest on the entire balance in your account. So, the interest earned in one month generates its return the next month. You will make $33.33 interest in your first month using the same example. However, you’ll earn $33.44 the following month as the compound interest model calculates interest on the balance of $10,033.33.

The interest earned in one year is called the annual percentage yield, or APY. The APY includes the effect of interest gains in a compound interest account. 

MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.

Years to save

The years to save is the number of years your investment has to grow. This portion of the calculation refers to how much time you have before reaching your goal. To illustrate, if you are 30 years old and want to save for retirement, you have 35 years to save if you plan to retire when you reach 65. 

Uses of a savings calculator for any type of savings goal

You can save money for many things. You could put money aside to build up an emergency, pay off debt or for a large purchase. A savings calculator helps you align your habits with your goals. 

Down payment for a house

If you plan to buy a house, a savings calculator can help you save money for a down payment. You can change such variables as years to save or the monthly deposit to see when you will have enough money to put down on a home. 

Retirement

To help reach your retirement savings goals, you should know how much money you need to retire. A savings calculator bridges the gap between your financial goals and how much money you must invest now.

Using the example above, let’s say a 30-year-old professional has $10,000 earning a 4% annual interest rate set aside for retirement. To reach $500,000 in retirement savings by age 65, the savings calculator reveals that monthly contributions of $502.93 are necessary. 

How much should you save each month?

How much you should save every month depends on your financial situation. While saving 20% of your household income is recommended, this goal may seem out of reach based on your financial circumstances.

A household budget can help you decide how much you should save each month. A budget details your monthly spending plan. To help reach your financial goals, set up automatic savings withdrawals as part of your expenses. Even if saving 20% seems out of reach, a budget can help you save for emergencies and big purchases. 

Plan your financial future with a savings calculator

Knowing how much money you need to save for life’s significant investments can be challenging. A savings calculator is an easy tool to plan your financial future. Whether you plan to save for a new home or retirement, a savings calculator can put you on a clear path to saving for your future. 

FAQ

You can check your 401(k) balance online, through the account statements you receive, through your employer, or by calling your 401(k) service provider. 

Let’s dive into the details below.

What is a 401(k)?

A 401(k) refers to a retirement fund account sponsored by employers. Employees can contribute a portion of their pre-tax wages to individual accounts, and employers can match these contributions. 

Your contributions to a Traditional 401(k) account up to $22,500 (for 2024) can be deducted from your taxable income for the year. If you are older than 50, you may qualify for catch-up contributions that allow you to exceed the standard limit by up to $7,500 (for 2024), for a total of $30,000. 

If you’re considering other investing options, MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

Where to find your 401(k)

You should be able to see your 401(k) account balance through the account provider’s website. 

Get in touch with your current or former employer’s human resources (HR) department if you need information about your 401(k) provider. 

If your old employer is no longer in business, use the Abandoned Plan Search on the Department of Labor website.

You can also check the National Registry of Unclaimed Retirement Benefits or the National Association of Unclaimed Property Administrators website and perform a search for Unclaimed Property. 

How to check 401(k) balance in 4 ways

You can monitor your 401(k) accounts in multiple ways. Here are some of them.

1. Online

The easiest way to check your 401(k) account balance is by logging in to a provider’s website portal.

Most companies outsource retirement and pension accounts to investment managers like Fidelity Investments, Merrill Edge, Charles Schwab Corp., and The Vanguard Group Inc. These companies have online portals that allow you to log in and monitor your 401(k) account. 

2. Employer’s Website

Some employers allow you to check your 401(k) balance through their websites. 

3. Phone

Call the plan administrator at the company that holds your 401(k) account and ask about your account. Your 401(k) statement should also have the plan administrator’s contact details. 

If not, contact the HR department and request details about the company’s 401(k) provider. Alternatively, you can look up the contact information about your plan administrator in the U.S. Department of Labor’s Form 5500 database. 

4. Statements

If you have a 401(k) account, you should receive a paper or electronic statement indicating your balance and other information in your mailbox or registered email. 

How often should you check your 401(k)?

Experts have a variety of opinions on how often people should check their accounts. Some suggest checking as infrequently as possible. Others recommend checking semi-annually and quarterly if you can handle volatile returns. 

You don’t have to check long-term retirement investments too often but monitor your 401(k) balance at least annually. 

Checking your account too often can jeopardize your retirement goals because normal volatility could make losses appear too prominent. If you see that you’ve lost money you may reduce your 401(k) contributions.

Why is it important to check your 401(k) balance?

Knowing how much you have saved for retirement matters for several reasons.

1. Track your progress toward retirement goals

Regularly checking how much you have in your 401(k) account allows you to gauge your progress toward your retirement goals. 

2. Ensure your investments align with your risk tolerance

Make it a habit to monitor your 401(k) to see whether the performance of your investments aligns with your risk tolerance. 

3. Adjust contributions

Tracking how much you have in your 401(k) allows you to adjust your contributions to stay on course with your retirement goals and risk appetite. 

What happens if you don’t check your 401(k) balance?

Not checking your 401(k) balance may lead to missed opportunities. 

For instance, if your 401(k) is lower than anticipated and you’re unaware of it, it may be too late to consider other investments to boost your investment returns. You may also miss changes in your account like higher fees that eat into your retirement savings. 

Keep track of retirement savings 

As one of the most effective ways to save for retirement, it pays to monitor your 401(k) accounts regularly. At least once a year, check your 401(k) account balance and make changes to rebalance your portfolio and track your progress toward your retirement goals.

FAQ

You can check your 401(k) balance online, through the account statements you receive, through your employer, or by calling your 401(k) service provider. 

Let’s dive into the details below.

What is a 401(k)?

A 401(k) refers to a retirement fund account sponsored by employers. Employees can contribute a portion of their pre-tax wages to individual accounts, and employers can match these contributions. 

Your contributions to a Traditional 401(k) account up to $22,500 (for 2024) can be deducted from your taxable income for the year. If you are older than 50, you may qualify for catch-up contributions that allow you to exceed the standard limit by up to $7,500 (for 2024), for a total of $30,000. 

If you’re considering other investing options, MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

Where to find your 401(k)

You should be able to see your 401(k) account balance through the account provider’s website. 

Get in touch with your current or former employer’s human resources (HR) department if you need information about your 401(k) provider. 

If your old employer is no longer in business, use the Abandoned Plan Search on the Department of Labor website.

You can also check the National Registry of Unclaimed Retirement Benefits or the National Association of Unclaimed Property Administrators website and perform a search for Unclaimed Property. 

How to check 401(k) balance in 4 ways

You can monitor your 401(k) accounts in multiple ways. Here are some of them.

1. Online

The easiest way to check your 401(k) account balance is by logging in to a provider’s website portal.

Most companies outsource retirement and pension accounts to investment managers like Fidelity Investments, Merrill Edge, Charles Schwab Corp., and The Vanguard Group Inc. These companies have online portals that allow you to log in and monitor your 401(k) account. 

2. Employer’s Website

Some employers allow you to check your 401(k) balance through their websites. 

3. Phone

Call the plan administrator at the company that holds your 401(k) account and ask about your account. Your 401(k) statement should also have the plan administrator’s contact details. 

If not, contact the HR department and request details about the company’s 401(k) provider. Alternatively, you can look up the contact information about your plan administrator in the U.S. Department of Labor’s Form 5500 database. 

4. Statements

If you have a 401(k) account, you should receive a paper or electronic statement indicating your balance and other information in your mailbox or registered email. 

How often should you check your 401(k)?

Experts have a variety of opinions on how often people should check their accounts. Some suggest checking as infrequently as possible. Others recommend checking semi-annually and quarterly if you can handle volatile returns. 

You don’t have to check long-term retirement investments too often but monitor your 401(k) balance at least annually. 

Checking your account too often can jeopardize your retirement goals because normal volatility could make losses appear too prominent. If you see that you’ve lost money you may reduce your 401(k) contributions.

Why is it important to check your 401(k) balance?

Knowing how much you have saved for retirement matters for several reasons.

1. Track your progress toward retirement goals

Regularly checking how much you have in your 401(k) account allows you to gauge your progress toward your retirement goals. 

2. Ensure your investments align with your risk tolerance

Make it a habit to monitor your 401(k) to see whether the performance of your investments aligns with your risk tolerance. 

3. Adjust contributions

Tracking how much you have in your 401(k) allows you to adjust your contributions to stay on course with your retirement goals and risk appetite. 

What happens if you don’t check your 401(k) balance?

Not checking your 401(k) balance may lead to missed opportunities. 

For instance, if your 401(k) is lower than anticipated and you’re unaware of it, it may be too late to consider other investments to boost your investment returns. You may also miss changes in your account like higher fees that eat into your retirement savings. 

Keep track of retirement savings 

As one of the most effective ways to save for retirement, it pays to monitor your 401(k) accounts regularly. At least once a year, check your 401(k) account balance and make changes to rebalance your portfolio and track your progress toward your retirement goals.

FAQ

Don’t Walk, Run on the Amazon hallway to get these! Download the Moneylion App for more Bougie on a Budget content every Wednesday!

Rainy-days will happen. You may have to come up with extra cash for a medical bill or an auto repair. Preparing in advance can make you financially resilient when life throws you a curveball. If you need cash along your journey, you can lean on our 0% annual percentage rate (APR) Instacash^SM advances.

Why you need a rainy-day fund

A rainy-day fund helps you cover short-term emergencies. Having these extra funds can minimize the likelihood of getting into debt and disrupting your monthly budget. For instance, if you earn $6,000 per mo and spend $4,000 per mo, you don’t have enough room in your monthly budget for a $10,000 emergency. The thought of covering that much ground can feel overwhelming, but a rainy-day fund can give you the financial resources you need to avoid any additional disruptions.

What’s the difference between a rainy-day fund and an emergency fund?

A rainy-day fund is optimal for short-term emergencies. These emergencies have costs that can quickly get resolved. Emergency funds are for long-term emergencies that can incur financial costs for several months. Both funds help you cover a surprise expense that requires immediate attention, but the duration of the emergency distinguishes these two types of funds.

Tips on how to start a rainy-day fund

Creating a rainy-day fund gives you extra financial flexibility when surprises strike. You can use these tips to fortify your rainy-day fund.

1. Make a budget

Budgeting helps you see what goes in and what goes out. To make a budget, list all your expenses in categories such as rent, utilities, food, transportation, entertainment, and savings. Separate your expenses into wants and needs, and make sure you pay for your needs first.

Compare your expenses against your income each month. Making a budget means you know how much you can afford, how much you can save, and what areas you can cut back on to reach your goals. You can get started today with a blank sheet of paper or a free budgeting template online.

You’re on the right track as long as you’re putting something — anything — away from every paycheck. The most important thing you can do is make saving a habit. Even if you can only save $1 per week right now, do it. Progress gets you moving in the right direction and can ignite more progress in the future.

Setting a goal for your rainy-day fund can strengthen your commitment to stick with the budget. If that’s $100 or $1,000, you’ll need to budget so you can allocate extra cash to your rainy-day fund.

2. Pick one nonessential expense to cut

When you make your budget, you may discover opportunities to make a few cuts to save money fast. The great thing is that you don’t have to make all of the cuts right away. Everyone has an expense they can remove, knowing the money is better off saved. If you get a coffee at the drive-through every day or get your nails done every week, or maybe you always forget to bring your lunch to work and end up spending money at the cafeteria.

Whatever your guilty pleasure or mindless expense is, make a resolution to stop spending and start saving it instead. One of our members saved $1,400 in a year just by skipping her daily iced coffee run.

3. Take advantage of financial tools

The MoneyLion app is full of resources to help you save money. From providing daily personalized savings tips to financial education, it gives you everything you need on your financial journey. 

The MoneyLion app also gives you tools to get more from your money, a key step to building your rainy-day fund. MoneyLion also provides 0% APR Instacash advances, so when you need extra cash, you won’t have to touch your savings.

4. Put savings on autopilot with auto invest

Savings accounts can provide some interest, but you could also help  build your rainy-day fund by having funds automatically deposited to an investment account. Consider assets like stocks and bonds that also have the potential to get mileage out of your money.

MoneyLion makes it easy to invest on autopilot. You can sign up for a fully managed Investment Account with MoneyLion and let us help grow your investment portfolio. 

5. Generate additional income

Generating additional income can help you build your rainy-day fund sooner. If you want to save for a $1,000 rainy-day fund, making an extra $100 each week with a side hustle will get you there in 10 weeks. Picking up extra side hustles will also expand your skills, and some of those side hustles can become full-time work. You can also explore career opportunities that offer more money or ask your employer for a raise. 

Making extra money is one of the best ways to grow your rainy-day fund, emergency fund, and portfolio. Trimming expenses will help, but you will eventually reach a limit. Focusing on income growth expands your possibilities and makes it easier to achieve key financial goals. 

Download the MoneyLion App to View Videos and Playlists on Side Hustles

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6. Explore the SteadyIncome Portfolio

Don’t like to take risks when investing? Consider MoneyLion’s SteadyIncome Portfolio. This very conservative portfolio allows you to invest in bonds through exchange-traded funds (ETFs). Bond ETFs are ideal for those who prefer to invest with stability and low costs. You can still earn interest while minimizing risk.

Here’s how to invest in SteadyIncome once you’ve opened a MoneyLion Investment account:

• Select “Finances” on your MoneyLion app.
• Select “Portfolio.”
• Tap on the “Edit Allocation” button.
• Use the risk slider to choose “SteadyIncome.”

7. Help your money grow

If you opt for a savings account that earns you little interest, you could actually be losing money over time. Your money loses spending power in a savings account because of rising inflation. Investing helps to grow your money over time, and investing over longer periods gives your money more time to grow because of compound interest.

Investing and purchasing crypto currency is subject to risk of loss, including loss of principal.

Also be sure to read our blog on 6 Tips to Get Started on a Rainy Day Fund

Make your money work smarter, not harder

MoneyLion makes it easy to help save and invest your money so you can achieve your financial goals. The app provides you with everything you need with personalized tools, tips, and offers to control every money moment in your life. 

Download the app here. 

FAQ

What is a Roth IRA?

A Roth IRA or individual retirement account is a tax-advantaged account. A Roth IRA allows you to pay taxes on contributions upfront, but then contributions grow tax-free. The major advantage is tax-free growth.

With a Roth IRA, unlike a traditional IRA, you can withdraw your contributions (the principal) anytime, penalty-free. But you cannot withdraw the earnings before age 59½ without penalties or meeting special exceptions.  

Unfortunately, there are upper-income limits for Roth IRAs. For 2023, you must earn less than $138,000 as an individual or $218,000 if you file taxes jointly as a married couple. A backdoor Roth IRA could be an option if your income surpasses those limits to still take advantage of these tax-advantaged accounts. Speak to a financial adviser to understand the implications of this option and whether it will work for you. 

Can you open multiple Roth IRAs? 

Yes, you can have as many Roth IRAs as you want. You can also have traditional IRAs or SEP IRAs. While most people don’t need 20 Roth IRAs, it may make sense to have two or three Roth IRAs, depending on your situation. However, regardless of how many IRAs you have, your total annual contributions to all IRAs cannot surpass IRS limits. 

Contribution limits for multiple IRAs

The contribution limit for IRAs in 2023 is $6,500. If you are 50 or older, you can make an extra $1,000 catch-up contribution.

 Remember that your contribution limit applies to all your IRA accounts across the board. No matter how many IRAs you have, you can contribute a total of $6,500 in 2023.

1. Traditional IRA

The IRS limits traditional IRA contributions to $6,500 in 2023. Even if you have more than one traditional IRA, you can only contribute the maximum amount the IRS allows.

2. Roth IRA

Like traditional IRAs, the IRS contribution limit for Roth IRAs is $6,500 in 2023. However, a Roth IRA has income limits. Your contribution may be limited or phased out if your income exceeds the IRS income limit.

The phase-out range starts at $138,000 for single filers. Once you earn $153,000, you cannot make a Roth IRA contribution. Contributions for married couples filing a joint return start to phase out at $218,000 in 2023. A married couple earning $228,000 or more cannot contribute to their Roth IRA.

Why would you want to have multiple Roth IRAs?

There are several reasons to have more than one Roth IRA, from investment diversification to multiple beneficiaries. Here’s a breakdown of why you might choose multiple Roth IRAs. 

1. Investment diversification

With several Roth IRAs, you can diversify different investments in each account. Of course, you can also do this with a single Roth IRA. But, with multiple Roth IRAs, it can be simpler to designate different accounts to different funds or investing goals. An investment adviser can help you make a diversified investment strategy according to your risk tolerance. 

Also, when you spread your assets over multiple Roth IRAs, you potentially gain better insurance coverage. In the unlikely event the brokerage holding the IRA fails, SIPC insurance on investment accounts can cover up to $500,000. To maximize coverage, you’ll need each Roth IRA at a different bank or brokerage, as two Roth IRAs at the same SIPC member brokerage firm the total $500,000 limit. 

2. Tax flexibility

With multiple Roth IRAs, you have the flexibility to take tax-free distributions from one account while leaving the other account untouched. Since Roth IRAs don’t have required minimum distributions (RMD), you can leave one or more Roth IRAs to grow tax-free to pass on to your heirs as part of your estate plan.

3. Have multiple beneficiaries

Creating multiple Roth IRAs allows you to easily distribute wealth to beneficiaries upon your passing. Rather than naming multiple beneficiaries on a single Roth IRA, you can set up a Roth IRA for each beneficiary to simplify distributions. 

4. Compare the performance of various providers

When you have multiple Roth IRAs, you can use different account providers and compare fees and performance over time. Of course, if you find one provider that is clearly better for higher returns or lower fees, you can move your other accounts to that provider.

5. Flexibility on withdrawal

IRAs have different withdrawal rules. Withdrawals from a traditional IRA are penalized if you haven’t reached age 59½, except in special circumstances. The IRS requires withdrawals after age 73. With a Roth IRA, you can withdraw your contributions tax- and penalty-free at any time. Plus, there are no mandatory age-based withdrawals with a Roth IRA.

What should you consider before having multiple IRAs?

While multiple IRAs might make sense long-term, they are not without some significant disadvantages. A few major disadvantages include: 

• Can be complicated and time-consuming: Having multiple IRAs requires frequent monitoring and coordination to ensure each account is funded properly and investments perform as expected. 
• Higher fees and expenses: Many IRA accounts come with fees. Even low fees across multiple accounts can add up.
• Potentially reduce overall returns on investment: When you split money across different accounts, you have less money building in each account. If you choose to invest in these accounts differently, poor performance in one account could mean lower returns. 
• Unequal investment allocation: Spreading investments across multiple IRAs makes monitoring performance and evaluating your investment mix harder.

Common mistakes that you should avoid with Roth IRAs

Roth IRAs are one of the most powerful tools to build retirement wealth with tax advantages. Here are a few common mistakes to avoid.

1. Making excess contributions

You can contribute a maximum of $6,500 per year to a Roth IRA as an individual or $7,500 if you’re 50 or older this year. While rates may rise slightly next year, you cannot contribute more than the maximum allowed. 

If you contribute more, the IRS will charge you a 6% penalty tax on the excess amount. It can charge this penalty for each year you don’t take action to correct the error, up to six years from the year the error occurred.

2. Forgetting to contribute to your spouse’s IRA

You and your spouse can each have your own Roth IRAs, doubling the amount you contribute. That means you can have double the savings and tax-free growth. The limit for a couple is either your total gross income or the contribution limit times two, whichever is less. Make sure to maximize IRA contributions for you and your spouse each year.

3. Breaking the rollover rules

You can only roll over an IRA once each 365-day period. Even if you have multiple Roth IRAs, you still only have one rollover. These limits don’t apply to direct IRA transfers, rollovers between IRAs and employer plans, or Roth conversions.

If you improperly roll over a distribution, you’ll have to pay a 10% early distribution withdrawal penalty, plus all applicable taxes for the year, unless you qualify for an exception. In addition, excess funds are subject to the 6% penalty (above).

4. Early withdrawal of earnings

While a Roth IRA allows you to withdraw contributions at any time, IRA withdrawal rules state that you cannot withdraw earnings before reaching age 59 1⁄2 without a 10% additional penalty. To avoid this, only withdraw contributions. You can withdraw earnings if you qualify for a withdrawal exception, such as a first-time home purchase, college expenses, and birth or adoption expenses.

Tips for managing multiple IRAs

You can better manage multiple IRAs with the following strategies:

1. Consolidate your accounts

Too many IRAs can be challenging to manage. Consider consolidating your IRAs to make oversight and tax reporting easier. Plus, you save money in fees when you have fewer accounts.

2. Keep track of contribution limits

You could easily contribute more than allowed with multiple IRA accounts. Keep track of every contribution you make for the year in one place to stay on top of what you’ve contributed for the year.  

3. Rebalance your portfolio

Your investment mix can change as the value of your investments grows or falls. Over time, you may find that the outperformers in the portfolio begin to take up a larger allocation of your portfolio. Rebalancing the portfolio helps to change your investment mix back to the original desired strategy.

4. Review and update your beneficiaries

The beneficiary of your IRA is entitled to funds after you die. Every IRA must have at least one beneficiary. Make sure you regularly review the beneficiaries listed on your IRA.

Stay informed about tax laws and rules

You could be stuck with taxes and penalties if you aren’t current on the latest IRA tax laws and regulations. Keep tabs on early withdrawal penalties and required minimum distributions.

Building Your Retirement Plan

A Roth IRA is a powerful tool for building long-term retirement wealth. Whether you choose two Roth IRAs for you and your spouse or multiple IRAs, these retirement accounts can give you the flexibility to increase retirement savings tax-free. However you choose to use them based on individual financial goals, Roth IRAs should be part of your retirement plan. 

FAQ

What is a 401(k) match?

With a 401(k) match, employers contribute a certain amount to a workplace retirement plan based on the employee’s contributions. A 401(k) match is an optional incentive employers can use to attract and retain employees.

Types of 401(k) matching contributions

The employee must contribute to their retirement account to benefit from an employer 401(k) match. Employers use different methods when making 401(k) matching contributions to an employee’s retirement account.

1. Partial matching

With a partial 401(k) match, the employer’s contributions are a fraction of an employee’s contribution to their retirement. Formulas can vary; however, a popular calculation used by employers is contributing 50 cents on the dollar for the first 6% of your earnings.

Employers may adopt a multilevel approach to calculate your 401(k) match using different salary rates. For example, an employer’s multi-tier formula could be a dollar match for every dollar you contribute up to 3% of your salary and 50 cents for every dollar contributed for the next 2% of your pay.   

2. Dollar-for-dollar matching 

Some employers match an employee’s 401(k) contributions, usually capped by a percentage of what you make. Under a dollar-for-dollar scenario, an employer may match 100% of your contributions up to 3% of your salary.  

Understanding how 401(k) matching works

An employer match is like free money. You need to understand your employer’s calculations to get the greatest benefit from a 401(k) match.

Under the partial match scenario above, the employer matches 50 cents for every dollar you contribute up to 6% of your earnings. Assume you make $50,000 annually and contribute 6% of your salary, or $3,000. Your employer matches 50 cents for every dollar you contribute or $1,500.

If your employer contributes dollar-for-dollar up to 6% of your salary, the 401(k) match is much higher. So, if you make $50,000 and contribute 6% of your salary, your annual contribution is $3,000. Since your contribution equals the 6% cap of the dollar-for-dollar match, your employer also contributes $3,000 to your retirement plan.

Remember that your 401(k) match will be less if you contribute a lower percentage.

How much can you contribute to 401(k) match?

The IRS limits the amount contributed to a 401(k) plan.

1. Employee and employer combined

The IRS imposes a contribution limit of $66,000 from both employers and employees. When you are 50 years or older, the IRS lets you make catch-up contributions of $7,500, bringing your max to $73,500.

2. Employee alone

For 2023, employees can contribute up to $22,500 to their 401(k) plan. Employees 50 years or older can make an extra catch-up contribution of $7,500 for 2023. The employer match does not factor into the employee’s maximum contribution. 

Remember that the maximum employee contribution applies to all 401(k) plans you have. So, if you have more than one 401(k) plan, change jobs during the year or receive a substantial raise, be sure the total contribution across all plans falls under the IRS limit for the year. You could be hit with extra income tax if you exceed the contribution limit.

What are 401(k) vesting schedules?

A vesting period is when an employee must work to earn the benefits given by the company. When your 401(k) plan has a five-year vesting schedule, you may not immediately own any employer matches made to your retirement plan. Instead, employees earn them over time.

With graded vesting, you earn a portion of your benefits over time. If your plan has a five-year vesting period, you make 20% of your benefits yearly.

Alternatively, you earn benefits after you reach a set period with cliff vesting. When your 401(k) plan follows a cliff vesting cycle, you wait five years before earning the employer match.

If your employment terminates before the end of the vesting period, you lose the remaining benefits. However, the money you contribute to the plan is yours even if you leave the company.

Grow your retirement savings with a 401(k) match

A 401(k) match is an effortless way to grow your retirement savings. In addition to your regular contributions, a 401(k) match builds up your retirement account. Best of all, you don’t have to do anything more than contribute to your retirement savings to take advantage of this valuable benefit.

FAQ