We all know saving for retirement is important. But, most of us can agree it can be a bit confusing and even overwhelming at times. It can be a challenge to understand each of the accounts that you may have access to or understand the difference between them. As I set out to deep dive into the topic I learned some accounts I didn't know were a thing and may come in handy for myself later on!
In my head retirement accounts are broken up into two main categories, pre-tax accounts and post tax accounts.
The money is taken out of your check before you even know it's there. Pre-tax accounts allow you to pay less in income taxes now so the government can let you grow your nest egg and tax it later.
1. 401 (k)
This is the retirement account you are probably most familiar with. This is typically offered through your employer- they might even offer a match on your contributions. If this is the case it would be great to get the full match as they are giving you free money. You can't take withdraws until you are 59.5 and if you try before that you'll probably have to pay a penalty. For 2019 the max you can contribute is $19,000 but if you are over 50 you can contribute an additional $6,000 to try and catch up.
2. 403 (b)
If you work in public services jobs like a church, school, non-profits, etc, this is the retirement account you probably have. For 2019 the max you can contribute is $19,000 and if you are over 50 you can contribute an additional $6,000 to try and catch up. Typically you can withdraw at 59.5 but if you retire at 55 you may be able to access it earlier.
3. 457 (b)
For those state or local government employees this is an additional option. You are able to invest and grow your money pre-tax but also withdraw money whenever you would need without a penalty. Obviously, you'd be taxed when you withdrew but it can be treated like an extra savings account if you wanted. If I remain in the schools and continue to grow my real estate portfolio at some point I'll try and take a couple hundred dollars to live off from there and starting putting money into a 457 to reduce my overall income but still have access to it if I needed.
4. Solo 401(k)
A sole proprietor can set up an individual 401(k) for him/her self or a spouse who they work with. This account is similar to the 401(k) listed above. You will be allowed to make contributions as both the employee and employer. You can potentially contribute up to $55,000 in 2018 (or $61,000 for someone 50 years of age or older). Total contributions will depend on your net business income.
5. SEP IRA
The full name is Simplified Employee Pension and it is easier to set up than a Solo 401(k) but harder to max out pre-tax contributions. This account is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to 25% of your income, or $55,000, whichever is less. There are no catch-up contributions on SEP IRAs.
6. Traditional IRA
If you have a job you can contribute up to $6,000 ($7,000 if you are over 50) of pre-tax dollars to your account. You'll need to invest the money yourself, whether that’s in a bank, stocks or bonds, or something else entirely. This part may get confusing so buckle in. If you're covered by a retirement plan at work, you can contribute to both an IRA and a 401(k) but you can't deduct your IRA contributions from your taxable income if you earn more than $74,000 (for single filers) or $123,000 (married filing jointly) in 2019. You can only take a partial deduction once your earnings reach $64,000 and $103,000 respectively. If you're not covered by a retirement plan at work, you get the full deduction no matter your income, unless you file jointly with a spouse who has a retirement plan at work. Like a lot of plans there is a penalty if you withdraw before 59.5. A traditional IRA is a good retirement plan but if you can get a 401(k) plan with a matching contribution that’s better.
7. Spousal IRA
Typically IRAs are for people with earned income but as you probably guessed this is for a non-working spouse. The working spouse's taxable income must be more than the contributions made to any IRA. This is great because it will allow a spouse who does not generate an income to still save for retirement.
8. Health Savings Account
This is one of the more tricky accounts to try and explain and I created a whole separate post about it here. If you have a high-deductible health insurance plan you can contribute $3,500 a year for an individual or $7,000 for a family. If you're 55 or older, you can contribute $1,000 more. If you don't need the money for medical expenses, you can invest it as you would other retirement savings. The way it works is you can withdraw money from your account to pay allowable medical expenses or if you don't spend the money, it rolls over indefinitely. Once you're 65, you can withdraw money for any reason without penalty, but you have to pay income taxes on the money you withdraw. Another option is to use it for retiree medical expenses tax-free. If you withdraw the money before you're 65 for any reason besides medical expenses, you have to pay taxes and a 20 percent penalty. A sneaky thing you can do is, if you save your receipts, you can withdraw money to reimburse yourself for expenses you paid years ago. Hopefully that made sense. Basically there are a lot of option and as I said there is a reason I did a whole post on it!
You are going to be contributing after-tax dollars which means there are no tax deductions. Good news is since the government is like 'We got our money now, don't worry about paying us later'. This works best for those people who think they may be in a higher tax bracket later on.
9. Roth IRA
If you make less than $137,000 (if you're single) or $203,000 (if you're married filing jointly) in 2019 you can contribute $6,000 (or $7000 if you are over 50) to your account. If your income is more than $122,000 (single) or $193,000 (married filing jointly), your allowed contribution is reduced. You can contribute to both a Roth IRA and a traditional IRA, but the contribution limits apply to your total deposits. Some people who make too much to contribute to a Roth IRA contribute to a conventional IRA and convert it into a Roth later. Just like the traditional IRA you will invest the money yourself, whether that’s in a bank, stocks, bonds or something else.
10. Roth 401(k)
This is very similar to the Roth IRA but you can contribute up to $19,000 (or $24,500 if you are of 50). You are able to get a match if your company offers it. You are able to access the money at 59.5 but have to have held it for 5+ years. Realistically, its very similar to a 401(k) but your taxes are paid now and not in the future. I although I would like to reduce my income now I like to believe I will make more in the future and be in a higher tax bracket than I am currently in.
What Accounts Do I Have?
I have what I believe is classified as a 401(a). I am a state employee so if I want that pension later on they decide all the things and I really have no say in the matter. I still have a personal Roth IRA that has grown significantly recently and I just got a health savings account. I have my three real estate properties ( 1, 2, 3) and at some point I will want to take like $500 a month out of that and open a 457(b). This will allow me to reduce my overall income and pay less in taxes now but still have access to that money if I ever got into a bind.
HELLO AND WELCOME!
I'm Jake, a dude interested in personal finance and travel creating the life I choose.
In 5 years I went from living in a basement with Craigslist roommates to paying off 90k of debt, backpacking 3 continents, getting a house for myself and 5 rental units.
Read my story in the about me section.
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