If you've ever been employed, there's a good chance you have a 401(k), an IRA, or both. But if you've just entered the workforce, these two concepts may be familiar to you, but you may not have a full understanding of what they are, how they work, and what you can use them for. Here, we are going to dive into retirement for people in every stage of their career.
Defining IRAIRA stands for Individual Retirement Account. There are three different kinds of IRAs, including traditional, Roth, and rollover IRAs. The one that's right for you will depend on what your current needs are for a retirement account. What's the difference between them?
- Traditional IRA – Contributions are tax deductible and lower your taxable income. If you withdraw funds before you're eligible (at 59.5 years old), you will have to pay taxes on the money and may be required to pay a penalty fee. - Roth IRA – There's no tax deduction for contributions to this kind of retirement account. Because of this, any withdrawals you make during retirement are tax free. The major difference between a Roth and Traditional IRA is when you pay the taxes. - Rollover IRA – You can transfer funds from a previously employer sponsored account, usually a 401(k), and have the opportunity to use the account to invest in things like stocks and ETFs. This allows account holders to maintain their non-taxable funds.
It can be a good idea to have some form of retirement account, no matter what stage of life you find yourself in. Over time, your retirement fund needs may change, and you can reevaluate and consider what the best next step will be. If you don't have an IRA just yet, there's a good chance you already have a different retirement account—a 401(k).
So, what's a 401(k)?This is an account provided to you by your employer. With a 401(k), you can make contributions from your paycheck each month to save for retirement. Some companies will match your contribution (either fully or partially) allowing you to save even more. But what happens when you switch jobs? Or if you want to move money from an old 401(k)?
You can always choose to liquidate your account, keep the money where it is (if your previous employer allows), roll it over into a new 401(k), or put it in a rollover IRA. This last option allows you to own your account outright without having it connected to your employer, and don't have to deal with all the back and forth of moving your funds around any time you start a new job. It's crucial to note that once you begin to withdraw money from a traditional 401(k), you will pay taxes on it the same way you pay taxes on your income. Keep this in mind as you decide what to do with your account before making any final decisions.
The Importance of Retirement AccountsEven if you have a 401(k) and are contributing a small percentage of your salary to it, it's crucial to really understand why you're doing this and plan out your investments for your future. While retirement may seem far away, the best time to start saving for it is now.
Different types of retirement accounts can do different things (as mentioned above), and you'll need to consider things like contribution limits, keeping a diverse portfolio to maximize earning potential, interest, when you are hoping to retire and begin making withdrawals, among other things. By keeping this in mind—for those who are earlier on in their career—you will likely thank yourself later on down the line.
401(k) to Rollover IRAFor those who have spent a decent amount of time in their career, a Rollover might be the next step in your journey to saving for retirement. As you've progressed in your field, it's possible you've needed to change jobs at least once, and probably have money just sitting in a 401(k) somewhere. Luckily, that money still belongs to you, and you should be able to access it pretty easily. Once you've gotten into your account and have made the decision to roll over your 401(k) to an IRA, where do you begin? First, make sure that your account is eligible. Then, check out this page for more detailed instructions on what steps to take next. Once your account is fully operational, you can set yourself up for success by planning ahead, investing, and making sure your retirement goals are met.
As always, investment and savings accounts are not one size fits all—what is best for you to do with your accounts may not be the same as your peers. You may not have a traditional 401(k) or may want to go a different route to change the way you pay taxes on the income. It might be a good idea to reach out to a professional before taking any actions in regards to moving your 401(k) to a Rollover IRA.
Don't let your money go to waste in an old account—invest and save so that when the time comes, your transition to retirement can be as seamless as possible.
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