Saving for retirement is an important part of accumulating wealth for the future and ensuring you’ll be financially independent during your golden years. But saving for retirement can come with its own learning curve and a whole lot of new acronyms you may have never heard before. This exercise will explore some of the most popular American retirement plans.
When it comes to retirement accounts, there are two common categories: 401ks and IRAs. The key difference between them is that 401ks allow those under the age of 50 to contribute up to $19,000 per year (as of Jan 2019), while IRAs allow up to $6,000. It is important to note that, while 401ks are typically more well-known due to popular employer-matching programs, both can be used together to maximize benefits.
These two categories of retirement plans can be broken down into different types, which often differ in their tax benefits. For example, the most common types of retirement plans are traditional and roth, which essentially translate to ‘before-tax’ and ‘after-tax.’ With traditional retirement plans, your contribution is made before you pay taxes on your income to the government, requiring that you pay later when it’s time to withdraw money from your account. Roth retirement plans, on the other hand, allow you to contribute after you’ve already paid taxes on your income, meaning that you will be able to claim your money without having to pay anymore taxes when withdrawal time comes.
It is also important to know that, regardless of the kind(s) of retirement account(s) you have, the growth of your retirement money is dependent on tax rates, inflation, interest, and fees charged by the companies that run your account. This means that it is extremely important to understand how your retirement plan works before you blindly invest.