When it comes to saving for retirement, you have several options. Two of the most common methods of saving are with a 401(k) or an IRA. Here is a quick rundown about what both of these types of accounts entail and what makes them different:
A 401(k) is an employer sponsored retirement plan. In many instances, your employer will match your contributions; ask about this when establishing your account.
There are two main types of 401(k) accounts:
A Traditional 401(k) account is where the contributions are taken out of the paycheck pre-tax. This means, once you retire, you will have to pay taxes on all of your withdrawals. For this type of account, yearly contributions in 2018 are capped at $18,500 for those under 50 and $24,500 for those over 50.
A Roth 401(k) is where the contributions are taken out of the paycheck post-tax. So once you retire and start making withdrawals, you won’t owe any taxes on this money. For this type of account, yearly contributions in 2018 are also capped at $18,500 for those under 50 and $24,500 for those over 50.
INDIVIDUAL RETIREMENT ACCOUNT:
An Individual Retirement Account (also called an IRA) is a retirement plan that is held at a financial institution. They can either be employer sponsored or by self-employed individuals. There are some accounts that require a person meet certain qualifications. For a Traditional IRA, contributions are capped at $5,500 in 2018 for those under 50 and $6,500 for those over. For a Roth IRA, contributions are also capped at $5,500 for those under 50 and $6,500 for those over. Simplified Employee Pension (SEP) IRAs are capped at $55,000 and a Simple IRA is capped at $12,500 for those under 50 and $15,500 for those over.
If you have 401(k) accounts with previous employers, consider rolling them over into an IRA.
A rollover can be completed in three easy steps:
- Choose an account. This can either be a traditional IRA, which features tax deferred contributions or a Roth IRA, which you pay taxes on before contributing.
- Withdraw funds. A request will be sent to your current plan manager or former employer to rollover the funds. Once they receive this request, either an automatic deposit will be made to your new IRA or a cashier’s check will be mailed to you.
- Invest Savings. Working alongside your financial advisor, you’ll find the options that work best for you.