Retirement Accounts

If you’re starting your first job (and even if you’re not), retirement might seem so far away that you don’t make it a priority to plan for it. But you should. People who invest in retirement accounts early in their careers earn much more money in interest by the time they retire than those who put it off.

But actually planning for the future can be difficult. There are several types of retirement accounts, and choosing one that is right for you is important. It’s wise to research each type thoroughly before deciding on a retirement plan, and the information below can help you get started. Here are the basics of common retirement accounts that can help you get on the path to healthy retirement savings.

401(k) or 403(b): These are among the most widely used retirement plans, partially because they are inexpensive for employers and beneficial to employees. With these accounts, you designate a certain portion of your salary to be set aside in your 401(k) each pay period. The money is saved before taxes, so a smaller percentage of your paycheck is taxed. However, you will pay taxes on the money you save when you withdraw it from your account later in life.

IRAs: “IRA” (Individual Retirement Account) is a broad term for any retirement plan that provides tax advantages in the United States. Employers sometimes sponsor IRAs, but they can also be independently managed. If your employer does not offer a 401(k), money you put into an IRA is tax-deductible. If your employer does offer a 401(k) and you still choose to open an IRA, you can deduct a portion of your contributions from your taxes if you meet certain criteria.

Roth IRA or Roth 401(k): These accounts retain all the characteristics of IRA or 401(k) accounts, except contributions are taxed before you put them into your account. This can be advantageous to certain people. If you are younger, you may be in a lower tax bracket now than you will be when you withdraw the money. Paying taxes now can save you money in the long run. You also have more time to let your retirement account grow, so you can afford to set aside less money every pay period. In this way, Roth IRAs and Roth 401(k)s can be great ways to invest.

Defined Benefit Plans: These are less common now than they have been in the past, but it’s good to understand them. Employers who offer defined benefit plans promise a certain amount of money to employees upon retirement. This could be in the form of a monthly pension or other periodic payment. You may have to work for a company for a certain amount of time to be eligible for a defined benefit plan, but it could be worth looking into.

Self-Employed Retirement Plans: If you are your own employer, you don’t have the advantage of retirement benefits provided by someone higher up the corporate ladder. But there are still options for you. SEP IRAs – Simplified Employee Pension Individual Retirement Accounts – have higher contribution limitations than many IRAs. SIMPLE Plans, or “Savings Incentive Match Plan for Employees,” are similar to 401(k)s and allow for a relatively high percentage of a business’ overall profit to be set aside for retirement. The Solo 401(k) plan is designed to give self-employed individuals benefits similar to those of traditional 401(k)s but is less labor-intensive administratively. Keogh Plans were created for people who own their own businesses. If you are self-employed, researching these types of plans can help you know what is best for your situation.