If you make saving a habit, you can create momentum and quickly begin building up your fund. Regular saving can become as commonplace as paying a monthly credit card bill. Prioritizing saving for retirement is doing your future self a huge favor – and helps ensure that retirement is some of the best years of your life. Check out some of the most popular retirement accounts below.
IRA
One of the most popular tax advantaged accounts is the IRA. While there are several types of IRAs, most people own a "traditional" or a "Roth" IRA. The traditional IRA allows you to contribute money that grows tax free until retirement. Many people can also deduct the money they contribute on their tax return. The earnings in your IRA are taxed when you withdraw them as are any contributions you deducted on your tax return when you made the contribution.
Roth IRAs
On the other hand, Roth IRAs grow tax free, but contributions cannot be deducted. Withdrawals in retirement from a Roth IRA, however, are tax free as long as you’ve had the Roth IRA for at least 5 years. Many experts suggest that Roth IRAs offer the better deal since the overall tax savings are likely to be greater but there are income limitations for contributions to a Roth IRA.
Another plan often used by employers is the Simplified Employee Pension (SEP) plan, which allows employers to set up and contribute to IRAs for their employees. This plan allows higher contribution limits than traditional or Roth IRAs.
Considering the tax benefits of IRA accounts, why would anyone invest in taxable accounts? There are a few serious limitations to IRAs:
No money may be withdrawn from the account before age 59 and one-half without paying a 10% penalty (though there are exceptions for reasons including disability, education expenses, medical bills, or buying a first home, among others)
Contributions are limited to $6,500 per year ($7,500 per year for those age 50 or older).
People earning more than a certain income are not allowed to participate in certain IRAs.
Those with a traditional (not Roth) IRA must begin withdrawing money by age 73, called required minimum distributions, or pay a steep penalty.
401(k)
There are several other types of retirement accounts that allow higher contributions, but the most popular is the 401(k) plan (also known as 403(b) for those working in non-profits). These plans allow total contributions that are more than three times as high as IRA. These are employer-sponsored plans, meaning that you must work for an employer that offers the program. If the employer does not offer the plan, it is not available to you.
Another benefit of many 401(k) programs is "employer matching," the matching of your contributions by your employer up to a certain amount. For example, the employer may contribute one dollar for every dollar you contribute, up to 5% of your total salary - a significant saving bonus.
Those saving for retirement may have both IRA and 401(k) accounts. Whichever you choose, start saving today so you can have a bigger bank for the future!