Retirement is a day in our lives that is marked on our calendars on the first day we start working. How it used to be is that many would work in the same place for 30 to 40 years, get a pension, and then when they hit the magical age of retirement, leave, and begin enjoying the later years of their lives. Times have changed and now people stay at jobs for a much shorter length of time, pensions are becoming rarer, and retirement is not an age but rather a financial number. With this new combination, individuals must start saving for retirement on their own and rely less and less on companies and governments. The most well-known retirement vehicles are 401K’s and IRA’s, and below is an explanation on each.
A 401K is an investment account that is offered by employers that allow their employees to use pre-tax dollars and invest them in the 401K. Most 401K plans have a variety of investments from conservative to aggressive. Using the pre tax dollars gives you more investing dollars up front, but you’ll pay taxes at the time of withdraw. Also, what sets a 401K apart from an IRA is that a 401K is only offered through an employer.
Addition to the tax benefits, some employers offer a match program where they will match what you contribute to your 401K up to a certain percentage. This is taking the place of the pension because the employer can still give you added benefits but eliminate the liability of having to pay you out at a later time. Lastly, there are contribution requirements so be sure that you understand what they are for the given tax year.
Another useful investment vehicle is the traditional IRA, which similar to the 401K, it uses pre-tax dollars. The only real major difference is that an IRA can be created by any individual with an income, and there are typically more investment options in an IRA compared to a 401k. Putting funds into an IRA locks them in there until you’re at least 59 and a half years old. If you need to withdraw the funds early, there is a penalty and you will be taxed at your current income rate. Same as the 401K, there are contribution limits so be sure to understand what they are for that given tax year.
Very similar to the traditional IRA, this is another retirement vehicle that may be a great fit for your situation. The similarities between the two IRA’s are anyone can open them and there are contribution limits. Now, a big difference is the dollars you are putting in are post tax. This means when you go to withdraw your funds after you’ve passed the age mark, you won’t have to pay taxes on them. Secondly, there are no required minimum distributions or RMD’s for short. Having that feature can help you greatly if you have money or property you want to pass along once you’ve passed away because it can stay in the Roth IRA forever essentially.
These are a few of the more common ways people can save for retirement today. Of course each one is slightly different, so it is important to complete your own research and decide which one will fit you best. With retirement resting on the shoulders of the individuals more and more, this is a wonderful way to start saving efficiently for that day you can hang it up one last time.