Between 401ks, IRAs, 403bs, 457s, there are a wealth of retirement account types for people to choose from.
Here’s where to start:
Employer Retirement Accounts
If you work for an employer that offers a retirement account, you are on your way to having one of the best retirement accounts available.
Your employer may offer a 401k. But, if they are a public sector employer, they would offer another type, such as a 403b, 401a, or 457.
While the numbers and letters differ, the concept remains the same: Contribute to a retirement account via your employer deducting the contribution from your pay.
Roth employer retirement accounts and Traditional employer retirement accounts: The difference between a Roth version of your employer retirement account and a Traditional version is whether your employer is contributing with pre tax income or with post tax income.
If the contribution is pre tax, then it is a Traditional employer retirement account.
If the contribution is post tax, then it is a Roth employer retirement account.
The Traditional employer retirement accounts are the original type of retirement accounts, with many employers adding the Roth (post tax) contribution option in the last 20 years.
If you do not work for an employer that offers a retirement plan, you can still take advantage of retirement accounts. The primary one is an IRA (Individual Retirement Account).
Individual Retirement Accounts (IRAs)
Many types of IRAs exist, with the 2 primary ones outside of employer plans being Traditional IRAs and Roth IRAs.
What is the difference between a Traditional IRA and a Roth IRA?
Traditional IRAs can be deducted from your 1040 (there are income limitations to be able to do this).
Roth IRAs cannot. However, Roth IRAs’ key benefit is to ‘pay the income taxes’ at time of contribution and to then be ‘done’ with income taxes. You never have to pay income taxes on withdrawals from a Roth IRA (except in these situations).
Can I Contribute To Both an Employer Retirement Account and an IRA?
Short answer that applies to most people: YES.
If you are fortunate enough to be able to contribute the maximum amount to your employer account, you should consider also contributing to an IRA.
Why?
Because these are tax advantaged accounts that are contributing towards your absolute #1 priority: Taking Care of Your Future Self.
This #1 priority is becomes even more crucial if your Future Self Retires Too Early.
How To Open an IRA
The first place to start is to think about the type of institution to open it with. A bank? A brokerage?
If you open your IRA with a brokerage, you will be able to invest your contributions in exchange traded funds or mutual funds that will have more success over the long run than an IRA opened at a bank in which your contributions are held just in cash or CDs.
While it may sound safe to keep your IRA in cash or CDs, it actually isn’t.
This is because of the loss of purchasing power due to inflation.
Remember what $10,000 would buy you 10 years ago? 5 years ago? What does it buy you today? That is the loss of purchasing power due to inflation.
So, opening your IRA at a brokerage is a safer bet for your money to grow if you invest it (remember to take volatility into consideration).
Some brokerages that are highly regarded are Fidelity, Charles Schwab, Robinhood, and Wealthfront.
Where To Go From Here?
Increase your contributions through time in increments of 1% overall contribution a year until you are contributing the maximum amount allowed.
This applies to employer retirement accounts and individual retirement accounts.
If you aren’t able to increase your contributions each year, that’s alright, do what you can.
If you ARE able to, congratulations! You are taking advantage of the easiest tax advantage accounts available to you.
Ready to take the next step and work with a fee-only CFP?
Reach out to schedule a Discovery Meeting to learn more.