Understanding Retirement Accounts

November 16, 2019

Investing in retirement isn’t always easy. Depending on your line of work, it can feel overwhelming and complicated to even imagine.

What are retirement accounts? How can you invest in them? Do you have the right one, and are you using it properly?

Let’s take a look, so you can evaluate your future more effectively.  

Taxes

Taxes, taxes, taxes. No matter your job, you’ll pay them – either right now, or in retirement. As such, when investing in your retirement account, it’s important to understand which category you fall into.

Later

Some accounts allow you to put un-taxed money away for retirement, also known as “tax deferred.” You will, however, have to pay taxes on that money once you withdraw it during your retirement.

Now

Other accounts are for money you’ve already paid taxes on. Specifically, it’s money that you’ve included as your income for that year and then stored. When you withdraw it during your retirement, you don’t have to pay tax a second time.

Which is Right for Me?

You can, of course, select either type for your account, depending on your current situation.

Do you have budget concerns? Then you may not want to pay higher tax for a higher income now. Here, it’s reasonable to stave that off with a tax-deferred account.

However, if you can afford it now, it’s generally wise to pay it now, rather than leave your retired-self with less money in the future.  

Employer-Based

In an employer-based retirement account, your employer creates a plan for you, where they’ll contribute funds – typically an amount that matches your own contributions.

401k and 403b

A 401k plan is the most well-known, because it’s very straightforward for both the employer and the employee. A 401k is issued to employees of a for-profit company, while a 403b is for non-profit employees.

For these, you choose to withhold up to $19,000 a year through payroll deduction. As this is handled by your employer, if you leave your job, you are required to take the initiative and roll the account over to your new employer, or else lose your investment.

Personal/Self-Employed

Other investment accounts can be obtained outside of work, or if you are self-employed.

Solo 401k

If you run your own business and have no other employees, you can set up a single 401k account for yourself. Here, you’ll act as both the employee and employer when making contributions. Unlike an employer-based 401k, you can make contributions of up to $56,000.

SEP IRA

This retirement investment account can also be used as a self-employed account. Since it’s meant for small businesses, this includes the owner, who is considered “self-employed”.

Other

Simply put, all investment account work in a similar way: With the money they contain, they buy and sell stocks that hopefully mature into a greater amount.

However, stocks aren’t the only option for your retirement account.

Bonds

Bonds aren’t just checks you receive from your grandparents on the holidays – they’re a well-established form of investment.

Typically, the kind you receive from family members are government bonds or “sovereign bonds.” It’s a form of credit, in which you give money to the government and they pay back a percentage every year. At an agreed-upon time, the full amount is then rewarded back to the bond owner. The longer this takes, the greater your interest – and the more money you earn in the final payment.

You can buy these personally, broadening your long-term savings, or customize your retirement account to leverage them.

Conclusion

Saving for your golden years is a very personal decision, influenced by your circumstances.

Perhaps the best choice is saving taxes for later, or paying them now. Perhaps a self-employed 401k suits your financial needs better than an employer-based one.

No matter the case, be sure to evaluate your current needs, your expected needs, and leverage all your options. It’s your future after all!