Part of knowing how to save for retirement is understanding all your retirement plan options. There are a variety of retirement savings plans out there, all of which have different rules and requirements.
To manage money properly, it is always a good idea to explore all your options before you open a retirement account. Some accounts are best for long-term investments, while others are meant to serve as a bridge between other financial plans.
Become an expert financial planner by learning more about the following types of retirement plans available.
A 401k is one of the most common types of retirement savings plans in the United States. It is a defined contribution (DC) plan, which means you (as the employee) specify a certain amount of money to be taken from your paycheck and deposited into the savings account.
With a 401k, the money you deposit into the account is pre-taxed. This means that it does not count as taxable income. You don’t pay any taxes on your deposits until you are ready to withdraw the money at retirement.
Most employers offer a 401k plan to full-time employees. Some may even match your contributions to a certain percentage, increasing your savings potential.
You do not always need to open a 401k through your employer. If you are self-employed or your employer does not offer this plan, you can open one as an individual. The Charles Schwab 401k, for example, is a popular individual plan for those who do not have access to an employer-sponsored plan.
A traditional IRA account is another viable option for retirement. This is a type of individual retirement account (IRA) open to anyone who earns money through traditional employment.
With this type of IRA account, you make pre-taxed contributions toward stocks, bonds or another type of investment. The money you contribute grows tax-free until you reach retirement.
You may also consider a Roth IRA, which is similar to a traditional IRA except regarding the taxes. With a Roth IRA, the contributions you make are taxed at the time you make them. When it’s time to withdraw the money, you do not need to pay taxes.
The Vanguard Roth IRA is a popular choice for those who enjoy flexibility. Unlike a traditional IRA account, the Vanguard Roth IRA allows you to withdraw the money you contribute before retirement without tax penalties.