Common Types Of Retirement Accounts in the US
The thought of starting your retirement plan might seem daunting, but really, it’s not much different than planning a family vacation- in fact it can be as easy as putting together a grocery list.
In my experience, folks tend to put off retirement plans as they think there are more (immediate) pressing things to think about – and that it’s really just too far in the future.
The simple fact is, when it comes to retirement planning, the sooner the better! Even holding off 1 year can have drastic differences down the line.
First, let’s examine the primary types of retirement accounts that are available in the United States.
401(k) – This is an employer sponsored retirement account that usually comes with some form of match from the employer. Think of the match like a bonus from your employer thats deposited for your retirement. For example, if your employer offers a 5% match, they will give you a GUARANTEED 5% bonus on top of whatever you contribute.
Since funds are contributed with “after tax” dollars, you will get an income deduction at tax time. For example, if your income in 2019 $65,000 and you contributed $5,000 to your 401(k), your income will be reduced to $60,000. This can trigger a refund at tax time!
You will be provided (by your employer) with a list of investments to choose from.The contribution limit for 2019 is $19,000 if you are 49 or under and increases to $25,000 if you are 50 or older.
IRA – This is like the 401k in that you will contribute using after tax dollars, it is not employee sponsored. So there is no match. This type of account allows you to invest in any publicly listed equity, mutual fund, bond, etc.
ROTH 401k and ROTH IRA – Like the above, the ROTH 401k is employee sponsored, that the ROTH IRA is not. These are my absolute favourite retirement vehicles as both the contributions grow tax free, so at retirement, this can be an incredible source of income if you have many years before retirement. At the time of this writing, you may contribute up to a total of $6,000/yr (combined) to these accounts.
With the 401k retirement account versions, you will be provided (by your employer) with a list of investments to choose from. while the IRA versions allow you to invest in any publicly listed equity, mutual fund, bond, etc.