Navigating Various Types of Retirement Accounts
By: Vincenza Vicari-Bentley, Extension Program Coordinator
December 7, 2021
When I first heard the term 401(k) I thought it was some sort of marathon race. I didn’t know anything about retirement accounts when I started my first job out of college. I learned over the years that saving for retirement can feel a little less intimidating when you are informed and have clear savings goals. Understanding different types of retirement plans and how they best align best with your savings and retirement goals will set you up for having some peace of mind. You might be thinking about saving for your retirement and you may be asking yourself —of all the options available to me, what is the difference and which are best for me?
There are several common types of retirement accounts available. Let’s discuss the benefits of each type of account.
A 401(k) is a work retirement plan that employers offer their employees. With a traditional 401(k), you can contribute your pre-tax dollars to the account. This means you can reduce your taxable income now if you make pre-tax contributions. There are contribution limits set every year by the IRS and if you are age 50 or older, you can contribute additional funds on top of the limit (called catch-up contributions). Some employers offer a company match (that’s free money folks!). As a general rule financial experts recommend that you try to contribute at least the minimum the amount that maximizes your employer contribution. Some employers offer a Roth 401(k) which means you pay taxes on the money before it goes into your retirement account and then that money grows tax free and you won’t pay taxes on that money (assuming you meet the IRS rules) when you begin to withdraw funds in retirement. Your 401 (k) contributions will be automatically deducted from your paycheck which makes it easy so you don’t forget to make your contributions!
403(b) works much like a 401 (k) except that this type of account is specifically for public school employees and employees of other qualifying organizations, including churches and charitable entities that are tax-exempt. If your employer offers a 403(b) plan, you and your employer can contribute to this individual account to help you save for retirement. And again, depending on your employer you may be eligible for matching contributions!
IRA (Individual Retirement Account) When you open an IRA through your bank, credit union or brokerage account you fund it yourself rather than making contributions through an employer. With a traditional IRA you may receive a tax deduction on your contributions. Just like a traditional 401 (k), your contributions and earnings will grow tax-deferred, but your withdrawals will be taxed. There is also a Roth IRA option which allows you to withdraw the money tax-free when you reach retirement and the balance will grow tax-free. Remember, you already paid taxes on this money before it went into your Roth IRA account. Both types of IRAs have contribution limits imposed by the IRS each year. There are also catch-up contributions available to you when you reach age 50. Remember that even if you are contributing to a 401(k) or 403 (b) you can still contribute to your IRA (minding those limits imposed by the IRS). Also, you must have earned income in order to contribute to this type of retirement account. However, non-working spouses can still contribute to an IRA as long as they file their taxes married/jointly and their spouse has earned income!
One of the best things you can do to plan for your own retirement is to get educated about your options. If you haven’t already started saving for retirement, start today. The earlier you start the more time your money has to grow and it’s never too late to get started!