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Choosing a Retirement Account that Best Suits You

Did you know…

  • According to the IRS retirement can last for 30 years or more
  • A retiree will need up to 80% of her annual income today to retire comfortably
  • The average benefit amount paid monthly by the Social Security Administration is $1,177

You can work the rest of your life or retire comfortably. If you want to retire, you need to invest money for retirement (IRA, Roth, 401(k)). Yes, the terms can be intimidating if you’re not familiar with them. If you’ve been putting off retirement savings because the terms are confusing and cause anxiety, read on to get some clarity. I want to help you rid yourself of some uneasiness today.


What is a retirement account?

A retirement account is a tax-friendly way to save money for your future. You can open an account and then make contributions (put money into it) regularly. That money can then be invested in different ways. The term investing simply means that you’re regularly setting aside money now so you can have more money later. By investing you’re allowing your savings to grow over time and earn you more money for your retirement.

Types of investments

Many people invest by purchasing stocks. These are tiny pieces of ownership in a company. When the company prospers, your stock’s value goes up which means you’ve earned money. When investing, never ever put all your money into a single stock. Single stocks are far too risky. Put your money in several different kinds of stocks. When you put your money into one of these retirement accounts or plans, you can choose a mutual fund to invest in. A mutual fund is a collection of stocks from different companies grouped together into one larger fund. Here are some options to invest in stocks:

What is a 401(k)?

The most common, a traditional 401(k), is a retirement savings plan offered by employers that allows an employee to take money out of their paycheck before it gets taxed and invest it for retirement. When you retire and withdraw your contributions and earnings, that is when you’ll pay taxes. To contribute to a 401(k), you determine the amount of money taken out of your paycheck automatically and it is then invested into your account.

What is a Roth 401(k)?

A Roth 401(k), is offered by some employers. It’s different from a traditional 401(k) because it’s funded with money that’s already been taxed. The money you take out at retirement is not taxed.

Some 401(k) plans include an employer match. This is when your employer will match your contributions up to a certain percentage of your salary. This free money allows you to save more for your future. If you have this option, you should try to contribute enough to your 401(k) to get your employer’s match.

What is a 403(b) and a TSP (Thrift Savings Plan)?

These are also retirement accounts you usually open with your employer. 401(k) plans are offered by for-profit companies, 403(b) plans are offered to teachers, nurses and other people who work for nonprofits. TSPs are offered to federal government employees. The money you invest comes out of your paycheck so you’re not taxed. You pay taxes on the money you take out when you retire.

What is an IRA?

An Individual Retirement Account (IRA) is a personal savings plan set up outside of your workplace.  It’s opened by an individual at a bank or other financial institution. The two types are, a traditional IRA and a Roth IRA. The annual contribution limits are $5,500 for those under 50 and $6,500 for those age 50 and over.

What is a Traditional (IRA)?

You are not taxed on the money put into it, but you’ll pay taxes when you take the money out at retirement. Once you turn 59 ½, you can withdraw any amount. If you withdraw money before 59 ½ you’ll will generally pay a 10% penalty. There are exceptions to this rule. After age 59 ½, you should be able to take money out penalty-free, but you will owe income tax on each withdrawal. Remember, Uncle Sam must get his cut. Required Minimum Distributions (RMD’S) from a traditional IRA are required at age 70 ½.

What is a Roth (IRA)?

You take money that’s already been taxed and invest it for retirement, so Uncle Sam gets his cut upfront. The money you put in a Roth IRA grows tax-free, which means you don’t have to pay taxes on it when you take your money out. It can be withdrawn tax-free after age 59 ½.

Now that you know some of the basics and  lingo, another very important term is financial advisor. These are the experts of the investing world. They offer advice on the kinds of funds you invest in and when to change your investments.

I strongly suggest you get one because they are the professionals. They understand how the stock market works and can recommend how to invest. Always ask them questions about any area of investing you don’t understand. Make sure you find an advisor who has the heart of a teacher. Once you have chosen one, meet with them regularly since your retirement is your responsibility.

Hopefully you are no longer anxious or uneasy about the terms anymore. Now let’s minimize the excuses, make a retirement plan, and commit to it. Get out of debt and start investing immediately. The more you save and the longer you save, the better your retirement can be.


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About Touya Kelley

Touya Kelley has spent the last 5 years of her life offering financial solutions to people. On her personal finance blog Break Free And Win, her goal is to help and encourage others to manage God's money well.

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