Are you looking to plan for retirement but don’t know where to start? Today we're going to break down 3 types of investment accounts that you can utilize to get saving now. But before you start, consult with your financial advisor to see how they can assist you in maximizing your savings with any of these accounts.
1. Individual Retirement Account (IRA)
First on the list is an Individual Retirement Account, better known as IRA. An IRA account is a retirement account that you contribute with either pre-tax dollars or after-tax dollars. You can make a maximum contribution of $6,500 per year. IRAs are known as tax-sheltered accounts because of the tax benefits you get. These accounts are used specifically for retirement and have a certain period before you can withdraw funds. There are two types of IRA accounts that you can set up, both offer different tax benefits.
The first type of IRA is a Traditional IRA. Traditional IRAs are funded with pre-tax dollars, which means any contributions to this account have not been taxed. The key benefit to the Traditional IRA account is contributions can be deducted from your taxes. However, since these funds have not been taxed, both the basis and growth in the account will be taxed upon withdrawal after retirement.
The second type of IRA is a Roth IRA. A Roth IRA is funded with after-tax dollars. This means all contributions to this account have been taxed. One of the major benefits that a Roth IRA offers is zero tax upon withdrawal. Since Roth IRA accounts are funded with dollars that have already been taxed, any growth within the account upon retirement is also tax-free. Unlike a Traditional IRA, contributions to a Roth IRA are not allowed to be deducted from your taxes.
If you want to find out more about Roth Vs. Traditional IRAs click here.
2. Standard Brokerage Account
A standard brokerage account can be opened up by any individual who wishes to grow their assets. For the individual who maxes out their IRA and still wants to invest for retirement, this investment account is the way to go. A brokerage account unlike an IRA, does not have any contribution limits. These accounts are known as taxable accounts meaning transactions in the account are taxable. Individuals who have a standard brokerage account have the flexibility of depositing and withdrawing funds from the account without paying a penalty. Because these accounts are easy to open up and get funded, it is a perfect way to start working toward your investment goals.
3. Company 401k
Utilize your company's 401k plan. A 401k plan is a company-sponsored retirement plan set up for their employees. More and more companies are offering 401k plans for their employees to encourage them to save for retirement. A 401k is in many ways like an IRA where you can make contributions directly from your pay. One of the unique features of a 401k is that your company can match up to a certain percentage in your account. That’s free money they match just for your saving! A unique attribute is that 401k’s have a much higher contribution limit than an IRA. In fact as of 2023, you can contribute up to $22,500.
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