Let’s Talk About Retirement Accounts!

By | December 21, 2011
I wanted to make this posts because I have gotten some questions concerning various types of retirement accounts such as an IRA, Roth IRA, 401k ect. So I want to explain the basics of what each account is.Image

Background:

In 1974, the US government passed a bill called the Employee Retirement Income Security Act (ERISA) to help employees with their retirement. Before then, it was expected that employers pay into a pension fund for their workers. Upon retirement after faithfully working for a company for many years, the worker would expect to receive a pension from their employer for the rest of their life. Post ERISA was a turning point when employers stopped offering pensions and converted their retirement and benefits toward a 401k. This put the investment risk and responsibility in the hands of millions of americans who before would have relied on their company to provide for them upon retirement.
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Out of this bill came several types of Accounts to help Americans save for retirement. Below are the different types:
IRA (Individual Retirement Account)
An IRA is basically a savings account for your retirement where the government offers you several tax advantages. The tax advantage for a Traditional IRA is that any contributions are tax deductible. Another tax advantage is that capital gains (the profit you make when your account goes up in value through stocks, interest) are not taxed. For an IRA, you can contribute up to $5,500 a year, and money can be withdrawn penalty free once you reach 59 ½ years old. Once you withdraw, the amount that you withdraw is taxed as your ordinary income
Roth IRA
A Roth IRA is similar to the IRA. You can contribute up to $5,500 a year with your after tax income. The main appeal of a Roth IRA is being able to withdraw penalty free before the age of retirement under certain conditions:
-You can withdraw up to $10,000 in order to put down a down payment on your first home
-You can also withdraw to pay for higher education such as college loans
For a Roth IRA and regular IRA, capital gains are not taxed, and since you paid taxes on your contributions already, any distributions are tax free.
Employer Sponsored 401k
A 401K is a type of retirement account where the employer can match contributions to the account (usually 3% of your pay) that you make. As of 2017, the maximum contribution is $18,000, and you can withdraw penalty free at age 59 ½. The main difference is that a 401k uses pretax income instead of post tax income like an IRA or Roth IRA. Because the funds in the 401k uses pretax money, once you withdraw, the funds get taxed.
ImageNow you know the basics of these three types of accounts, you should do some of your own research to see which retirement plan works best for you. More likely than not, a roth IRA is good for someone who is younger and is planning to work for many years. If you plan on making more money several years from now, you will be bumped into a higher tax bracket, so it may be good to pay taxes now than pay later.
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One thought on “Let’s Talk About Retirement Accounts!

  1. Shawnna Nafziger

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