Introduction
If you’re in the market for a new retirement account, you’ve probably come across a lot of information. Some of it will be right for your situation, but some might not be. The problem is that it’s hard to know what’s best for you without getting an overview of the options out there. That’s why we’re going to walk through some common types of retirement accounts and their pros and cons:
401k
You are probably wondering why the 401k is so special. Well, let’s start with what a 401k is and its main benefits of using one. In essence, a 401k is a retirement plan offered by your employer that allows you to save money on taxes before they are withdrawn from your paycheck. There are several types of plans: traditional, Roth and combination (mixing both).
You can contribute up to $19K annually into a 401(k) plan in 2019 ($25K if over 50). This contribution amount changes each year depending on inflation which means the contribution limits may change slightly every few years. The money invested through this account grows tax-deferred until you withdraw it during retirement at which time it will be taxed at ordinary income rates which can be as high as 37%.
403b
A 403b is a retirement plan that’s similar to a 401(k). It’s administered by your employer, but you have more control over the investments and how much money goes in. The biggest difference between the two plans is that with a 403b, you can choose which funds are offered.
With both types of plans, you’ll pay pre-tax money into them and get tax relief when you withdraw it later. That means all the gains on your investments are yours—they don’t get taxed again when they’re withdrawn from these accounts during retirement.
If you qualify for these tax breaks and if your employer offers matching contributions (which most do) then it makes sense to contribute as much as possible each year so that you don’t miss out on free money!
457
The 457 plan is a retirement savings plan for state and local government employees. The name comes from the section of the Internal Revenue Code that covers these plans, which are administered by either an employer or an individual’s financial institution.
A 457 may be tax-deferred, which means your contributions are not taxed until you withdraw them in retirement. The same is true for any investment earnings on those contributions. Unlike 401k plans and 403b accounts, however, there are no limits on how much you can contribute to a 457 plan each year; however, you may need to pay taxes if you take money out before age 59 1/2 (unless it was rolled over into another tax-deferred account). You also cannot have access to these funds prior to retirement age without incurring penalties or taxes – unlike with 401k plans or 403b saving accounts where withdrawals can be made at any time without incurring penalties or taxes so long as they’re used toward expenses related directly toward your education such as tuition fees or textbooks costs associated with pursuing higher education credits/degrees.*
IRA
IRAs, or Individual Retirement Accounts, are tax-deferred retirement accounts. This means that you don’t have to pay taxes on the money you keep in your IRA until you withdraw it for use during retirement. IRAs are available to all taxpayers, but there are some restrictions on who can contribute what type of money and how much each year.
IRAs can be used for both education and first home expenses (up to $10,000 total), down payment on a home ($10k per person) and penalty free early withdrawal from an IRA if used for medical expenses after age 65 (or age 55 if disabled).
Know your numbers, know your choices
There are a lot of options out there, and it can be confusing to know which one is best for you. You need to understand the different features of each type of account before you decide which one is right for your needs.
If you choose a 401k, or any other type of retirement account like an IRA or SIMPLE IRA, then no matter what happens with interest rates (or anything else), your money will be growing tax-deferred until it’s time to start withdrawing it. This means that no taxes will be taken from your contributions or investment earnings until later on when you withdraw them during retirement age.
You should also know that there are two types of 401ks: traditional and Roth. The difference between these two has everything to do with how much money is taxed now versus later on down the road when it comes time for distribution into retirement accounts – if either type is used properly then they could end up saving tens thousands dollars in taxes over their lifetime!
Conclusion
Both of these plans offer great benefits, but you need to understand your own personal situation before deciding which one is right for you. Just because others have had success with a certain option doesn’t mean it will work for everyone. So do your research and find out what works best for your situation!
