As a new graduate, you may be dealing with a dizzying number of new responsibilities, many of which involve money. There are helpful financial checklists aimed at graduates that recommend money-related habits or management tips. However, to put many of these lessons and ideas into practice, you also need to understand how different types of financial accounts work.
With simple explanations for each, here are several of the financial accounts you may encounter.
Non-Student Checking Accounts
You may have a student checking account that doesn’t have a minimum balance requirement or monthly fee. After graduating, your account could automatically switch to a standard checking account.
With many checking accounts, you’ll need to pay a monthly fee unless you meet a requirement, often a minimum balance or direct deposit each month. You may want to consider switching to a new non-fee checking account if you can’t meet the requirements.
Employer-Sponsored Retirement Accounts
According to the American Benefits Council, most full-time workers at large companies have access to an employer-sponsored retirement account, such as a 401k. If you work for a non-profit, educational institution, or government organization you may have, a 403b or 457 plan rather than a 401k. You can use these accounts to save for retirement, and get tax advantages for doing so.
You can generally choose to contribute a particular dollar amount, or a percentage of your pay, from each paycheck to your 401k account. You also may need to decide where the money gets invested once it’s in the account. You’ll likely be able to choose from a list of different mutual funds, and can ask your 401k manager or look online for guidance.
Your employer’s 401k plan doesn’t necessarily offer the best investment options or lowest fees, but many organizations offer a company match that can significantly increase your savings. The company might match a portion of the amount you contribute, up to a percentage of your annual salary. For example, the company may deposit 50 cents for each $1 you contribute, until they add the equivalent of six percent of your annual pay.
During 2016, you can contribute up to $18,000 ($24,000 for those that are 50 or older) into a 401k, 403b, or 457 plan, not counting the employer’s matching. Your contributions are tax-deferred, meaning you don’t have to pay income taxes on the money this year. In practice, you’ll get a deduction equal to your contribution. You do have to pay income taxes on the money when you withdraw it, unless it’s a Roth account.
You may have to pay a 10-percent penalty for withdrawing money from your 401k before you’re 59 and a half, but there are exceptions to help pay for medical, home, and educational expenses.
Independent Retirement Agreements
If your employer sponsors a retirement account and offers matching, it may be best to start saving for retirement with that account. But, if you don’t have access to an employer-sponsored account, max out your contribution and want to save more, or want more control of where you invest your money you can save money for retirement in an Individual Retirement Agreement (IRA). They’re also often referred to as individual retirement accounts.
There are several types of IRAs, but unless you run your own business, you’ll likely want to use either a Traditional IRA or a Roth IRA. There are differences, but both accounts offers tax advantages.
- Traditional IRA – Contributions are post-tax, meaning you don’t pay income taxes now (you get a tax deduction), but will need to pay taxes when you withdraw the money. Aside from special circumstances, you’ll pay a penalty for withdrawing the money before you’re 59 and a half.
- Roth IRA – Contributions are pre-tax, meaning you pay taxes on the money before making contributions (no deduction). You can withdraw your contributions at any time, but a few special circumstances aside you’ll pay a penalty if you withdraw earnings before you’re 59 and a half.
With either IRA, you can contribute up to $5,500 in 2016. Those that are 50 or older can contribute $6,500. As with employer-sponsored retirement accounts, you may need to decide where to invest your money once it’s in an IRA. There are income phase-outs on the tax deductions depending on how much you earn and if you already have access to a retirement plan at work.
The government-sponsored myRA account is a type of a Roth IRA. Intended for beginner investors that don’t have access to an employer-sponsored plan, myRA accounts don’t have fees or minimum funding requirements and guarantee a return on your investment without loss of principal.
The return on an investment in a myRA was 1.75-percent APR during April 2016, higher than you’ll get in most checking or savings accounts account but lower than what you might get by making riskier investments. However, if you’re able to just go ahead with a Roth IRA, then it probably makes more sense in many cases.
If you want to try your hand at investing without using a tax-advantaged retirement account, you can open a brokerage account. There are many brokerage account providers, including major financial services firms such as Fidelity, Merrill Lynch, Charles Schwab, and Vanguard, as well as online discount brokers like TradeKing and RobinHood.
You can deposit money into your brokerage account and then buy stocks or funds with it. You’ll likely be able to buy the same investments no matter where you open an account, but the fee to make a trade depends on the broker. Funds that aren’t invested often stay in a money market account, a bit like an interest-bearing holding account.
Flexible Spending Accounts
A flexible spending account (FSA) allows you to use tax-free money to pay for some medical expenses. FSA accounts must be set up by your employer, and you can only put up to $2,550 into the account per employer. However, that may be more than enough, because if you don’t use the money within the year, you have to forfeit it. Some employers let you rollover $500 to the following year and/or give you a two-and-a-half-month grace period at the beginning of the next year.
Health Savings Accounts
A health savings account (HSA) is medical savings account that you can have access to if you’re enrolled in an HSA-qualified high-deductible health plan. In some cases, your employer may make contributions to your HSA. Unlike the FSA, your HSA funds never expire. You can invest the funds and use them in retirement if you’d like. In 2016, the contribution limits for HSAs are $3,350 for individuals and $6,750 for families.
As a new graduate, there may also be several types of insurance you should consider purchasing.
- You can stay on a parent’s health insurance policy until you turn 26. If this isn’t an option, you may want to buy coverage because there’s a penalty if you don’t have health insurance. Depending on your income and where you live, you may qualify for assistance paying for health insurance.
- Auto: If you own a vehicle, you’re required to have auto insurance to drive it. Minimum insurance requirements vary by state, and the price can vary by provider.
- Renters: Renters insurance can help protect you if your apartment is damaged or destroyed, someone gets hurts while visiting you, or your property is stolen (sometimes even if it’s stolen when you’re outside the home).
There may be discounts on auto or renters insurance that are fairly easy to get. For example, the one-time cost associated with buying a fire extinguisher for your apartment, or an anti-theft device like a steering-wheel lock for your car, could result in lower premium payments. You also may get a discount for buying multiple forms of insurance through the same provider.
While the details of each account or insurance policies can be tricky to understand, the basic function is often straightforward. Keep this guide handy as you may have a reason to open, or use, one or more of these accounts or policies in the coming months.