It is never too early to start saving for retirement. But which kind of retirement savings account is best for you? Different types of retirement plans have different rules, including how your money is taxed and how much you can contribute each year.
Continue reading to learn more about different types of retirement savings accounts to help you make an informed choice.
When looking at retirement savings plans, many people will want to know what 401(k)s are. In simple terms, they are a type of retirement account that is sponsored by your employer. You are able to make contributions to the 401(k) account, and your employer may match these contributions, allowing you to further grow your money.
Employers will use different formulas for matching funds, such as 50 cents for each dollar or perfectly matched dollar for dollar contributions.
When your employer offers you a 401(k) account, you will choose the investments, which might include stocks, mutual funds and other assets.
Your 401(k) plan offers tax advantages, and this makes it a popular option when it comes to retirement savings. There are two main types of 401(k) accounts: the traditional 401(k) account and the Roth 401(k). The key difference is that with a traditional account, you do not pay taxes when you make contributions. However, a tax will be applied when you make a withdrawal from the account.
In contrast, the Roth 401(k) requires you to pay taxes when contributing money, but withdrawals are not taxed. If you want the advantages of both types of account, you may open both a traditional and Roth 401(k) account.
One important thing to keep in mind is that there is a limit as to what you can put into your 401(k) each year. 401(k) contributions max out at $19,500 annually for people under 50 years of age. For people 50 years of age or older, the maximum annual contribution is $26,000. However, these figures do not include employer matching. The total limit, including employer matching, for employees under 50 is $57,000, while the limit for employees 50 years of age or older is $63,500.
Withdrawing from your account before you are 59- and six-months years of age results in a 10 percent penalty on the amount you take out.