Betches said it best! Here's our best shot at the skinny on retirement savings accounts.
Not only will BB&B break down 401(k)'s- but we'll also look at the other options for saving for your future. Prepare to be well informed and never ask the below question AGAIN!
When you're in your 20's, 30's even 40's, retirement may seem like a long ways off. Why should I be keeping my hard-earned money from myself when I could be using it to jet to Baha Mar with my girlfriends (Real Housewives of Beverly Hills style, you know.)
BECAUSE, life is hella expensive. You may think life is costly now, but just wait until you're your grandparents age. Healthcare, travel, simply daily life...imagine living the way you do now without an income...pretty tough, right?
Hopefully when you're in your 60's, you will be winding down your career (maybe sooner or later, depends!) but one day you (probably) will be in fact living without a steady income (possibly still investments etc. but not a paycheck.)
So, let's put Baha Mar on the back burner for now and talk about saving instead of spending!
Will make this as simple & painless as possible- bible. Thanks to the TheBalance.com for guidance on this post.
401(k). A workplace retirement account that is offered as an employee benefit. Basically, thanks for working here, we're going to administer a retirement account for you as an extension of our gratitude.
The account allows you to contribute a portion of your PRE-tax paycheck to tax-DEFERRED investments.
Good lord, what?! If your GROSS salary (Gross = BEFORE taxes) was $75,000 and you contribute $5,000 to your 401(k)- come tax time, you will only be taxed on $70,000.
You can begin withdrawing at age 59 1/2...any earlier, you will be fined a penalty. The maximum annual contribution is $19,000 as of 2019. If you're over 50, you can contribute $25,000.
What is the big draw to this? COMPANY. MATCHING. English!? Some companies will "match" up to a certain percent or dollar amount. If your company offers to match up to $5,000- you would be smart to put in at LEAST $5,000. It is essentially free money.
Individual Retirement Account (IRA). This route is chosen by individuals who 1) do not have a company 401(k) plan or 2) you have maxed out your 401(k) for the year and would like to tuck a bit more away.
An IRA is used to invest money for retirement in stocks, bonds, mutual funds, exchange traded funds (ETFs), etc. A cool part of an IRA is it truly acts as an investment account- you can buy and sell investments as you normally would. However, the retirement aspect comes into play as you cannot REMOVE money from said account until age 59 1/2, similar to the 401(k).
Many taxpayers can deduct their IRA contributions on income tax returns IF they don't also have a 401(k) at work which will reduce their taxable income *there are restrictions*
It takes about 15 minutes to open an IRA. You can do so with investment firms such as E*TRADE, Fidelity or the one I personally use, Vanguard.
There are 2 types of IRA's.
Traditional IRA. This will be an account invested with PRE-tax money. As discussed above, Uncle Sam will come to collect taxes when you withdraw this money later.
Roth IRA. This will be an account invested with POST-tax money. Meaning, your gross sum you are paid will be taxed, then the money will be invested and never taxed again.
A Roth is unique as the age 59 1/2 does not apply- you may withdraw contributions at any time without a penalty (with a traditional it's usually 10%.) Note, it has to be at least 5 years after you started the account*
Contribution limits to IRA's are low though: $6,000 for both types in 2019, $7,000 if you're over 50.
Roth 401(k). A little combo here!
This is essentially a mix of the features of a 401(k) and a Roth IRA. This is similar to a 401(k) as it is offered through employers.
This is a new instrument as it gives the Roth aspect of contributions coming AFTER taxes. Same as the Roth IRA, contributions are never taxed again as long as you remain in the plan for at least 5 years.
A contingency here, if you're making relatively big bucks*, you may be restricted to contributing. *$122,000 for single filers in 2019 up to $137,000. $193,000 to $203,000 for those filing jointly.
Simple IRA. The Savings Incentive Match for Employees (SIMPLE) IRA is a retirement option for small businesses with less than 100 employees. 401(k) plans are a large reason many people join large firms, therefore, this is a chance for smaller firms to also give a similar draw like the big dawgs.
Very similar to a 401(k), the account is made with PRE-tax dollars. Again, the money will grow tax deferred until retirement (it will be taxed upon withdrawal.)
The penalty for early removal is the kicker here, if you take money out within 2 years of opening and/or before age 59 1/2, you will pay a penalty of 25%- yikes!
One more- you cannot borrow money from a SIMPLE as you can from a 401(k).
SEP IRA. A Self Employed Pension IRA allows you to contribute a portion of your income to your own retirement account if you're self-employed and have NO employees.
You can fully deduct these contributions from your taxable income. The maximum contribution limits are higher than the others- for 2019, $56,000 or 25% of your income, whichever is less.
Can I have more than one plan? YES. As seen above, you can have a combination. The amount you may deduct from your taxable income will be capped at a certain point though.
Decide how much you're wanting to save and go from there.
What if I need to use the money in my 401(k) for an emergency? Most plans offer what is known as 401(k) loans if you find yourself in a bind...this should be a last resort!
What if I quit my job? What happens to my 401(k)? At this point, you will have a decision to make:
Should I be saving money besides of 401(k)? How can I put this gently- DUH. The more money you save, the better! If you want to buy a car, a house, a yacht, a plane, a giraffe (you do you)- you need to be saving and investing separate from retirement funds.
This money is not to be touched until you're up there in age- so do not rely upon it. It will be there to help you one day but this is not your emergency fund. Think of it as your nest egg but also don't think of it at all. Just ensure you're contributing and not leaving money on the table.