If you are looking to set up a retirement account or an investment account and you want a quick explanation of your options, you came to the right place. There are so many acronyms and numerical distinctions out there that it can be confusing to understand what to do. Here is a simple breakdown to help you better understand your options:
Roth IRA (Individual Retirement Arrangement)
Tax free growth account which means that you will NOT be taxed on your earnings in this account. This is ideal as most people invest with the idea that the account will grow and not having to pay taxes on that growth is a good thing. If you are married filing jointly and make less than $166,000, you can contribute up to $5,000 a year. For more specifics on contributions click on this link to the IRS’s website.
Tax deferred account which means that you will not be taxed until you decide to start taking money out and you WILL be taxed on the earnings of the account. The General Limit for contributions is $5,000 but is a little more complicated than a Roth so click here to find out more.
401K (Section 401k of the Internal Revenue Code)
Employment related retirement account. It is best to invest only if your company matches and pay the max of what the company will match. For instance, if a company matches up to 5% then you invest 5% as well.
403B (Section 403B of the Internal Revenue Code)
Retirement Account for employees of the public schools as well as tax-exempt organizations. This similar to the 401K in that it comes out pre-taxed and you will be taxed once you begin taking withdraws.
If you are looking for a plan of action, here is what I would consider:
If you company has a 401K matching plan, max that out. Then anything above that I would put into a Roth IRA so that you can receive the benefits of tax-free growth. Also, you need to start investing NOW! If you started investing $750 a month and received an annualized return of 8%, you would have $1,056,413 in 30 years. You may need more than that to retire, however, the point is that in order to have money to retire, you need to start investing NOW! According to a recent study, 43% of Americans have less than $10,000 saved for retirement; do you want to be one of those people?
Fine Print: Please keep in mind that these are solely my views and that I would recommend that anyone interested in investing should do their own research and make an educated decision based off of that research. If your scenario is unique and requires the attention of a personal Financial Adviser, I would highly recommend that you meet with one.