Given the state of our current economy, it’s no wonder that you might think it’s better to put off saving for retirement. Here’s the truth: even if you can only afford to save a few bucks a week for now, it’s better than not doing anything. Here’s the better truth: there are a bunch of different ways to save specifically for retirement. Here is a quick overview of 4 of the retirement accounts you should seriously consider: 401(k), IRA, Roth IRA, and 403(b).
1. 401(k)
The 401(k) works like this: Every pay period, a portion of your earnings is automatically set aside in a high interest savings account that you can use to fund your retirement.
The primary benefits of going with the 401(k) are:
- This plan allows your employer to match the amount you save with a (for lack of a better word) donation equal value to the account. So, really, you’re doubling the amount you’re saving.
- The amount you save is also diverted into your 401(k) account before taxes are calculated for your paycheck. This means you’ll be paying less of your paycheck to the IRS—at least for now. Once you start withdrawing from your 401(k), you will have to pay taxes on those draws.
- The portion you decide to save is taken automatically out of your paycheck and diverted into your 401(k) account for you. You don’t have to do anything except decide how much of each paycheck you want to save.
2. IRA
A “regular” IRA works a lot like a 401(k). Every month or pay period you set aside a portion of your earnings or paycheck into an Individual Retirement Account (hence the acronym). Like the 401(k), this retirement account reduces your tax burden because you don’t pay taxes on your savings until you start to withdraw funds from the account. The primary difference is that, unlike the 401(k), your employer doesn’t match your contribution to your IRA.
3. Roth IRA
The Roth IRA is almost exactly the same as a “regular” IRA, with one significant difference. Instead of being diverted pre-tax, the contributions you make to your Roth IRA do not reduce your current tax burden. Your taxes are calculated normally.
But! Since you’re paying taxes on that money now, that means you won’t have to pay taxes on it later when you want to start drawing from your Roth IRA account. This is handy for people who want to know exactly how much money is waiting for them at retirement.
4. 403(b)
The 403(b) retirement account is basically a 401(k) account, except that the 403(b) is only offered to employees of non-profit and governmental organizations. These accounts can also be called TSA plans or Tax-Sheltered Annuity plans. They are called this because the account owners do not pay taxes on their contributions at the time of the deposit. Instead, the money is allowed to sit in the account, accumulating interest. Taxes are only paid on the funds inside the account once they are withdrawn.
While there are other types of retirement accounts designed for specific types of workers (like the SEP for the self-employed), the four account types we’ve listed here are the most common. These retirement accounts are where you should start when you are ready to start saving for your eventual retirement. You just need to be consistent and committed to achieve your retirement goals.