Investment 101: Retirement Accounts

401k In the United States a 401K is a tax qualified defined contribution pension account Employers contribute to your account a match towards your contributions (typically 3%-5%)

Traditional Ira vs. Roth IRA

Tax Benefits Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. 

Income Taxes The first $18,550 of your income will be taxed in the 10% tax bracket, resulting in $1,855 in taxes. The next tier of your income—$56,749 ($75,300 minus $18,551)—will be taxed in the 15% tax bracket, resulting in $8,512.35 in taxes. The remainder of your income—$24,699 ($100,000 minus $75,301) —will be taxed at 25%, resulting in $6,174.75 in taxes.

Withdrawal Rules One major difference between traditional IRAs and Roth IRAs is when the savings must be withdrawn. Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 70 1/2. Roth IRAs, on the other hand, don’t mandate withdrawals during the owner’s lifetime. So, if you don’t need the money, Roth IRAs can continue to grow tax-free throughout your lifetime, making them ideal wealth-transfer vehicles. Beneficiaries of Roth IRAs don’t owe income tax*

Roth IRA Deposits Total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you're age 50 or older)

Recommended investments… 'Mutual Fund' An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets

Mutual Funds Look for mutual funds with proven track records of 10 years or more If unsure about what to pick, look at the investments that are in the portfolio

Compound Calculator Use a compound calculator to figure out projections for your money to grow As you get older and can afford to invest more you want to recalculate GENERAL RULE – when you get a raise put at least half or all of it into your 401K or Roth IRA