Do I do a 401(k), IRA or both? This is a question you may be asking yourself. With so many options, it may seem confusing. It’s never too early to plan for retirement. It doesn’t have to be complicated. The following information on the main types of retirement accounts should help you make a Centsible plan to saving retirement.

Employer sponsored retirement accounts

• 401(k)s are the most common employer-sponsored retirement accounts. There are other types such as 403b for teachers, simple IRAs, and some companies still have pensions.
• With employer retirement accounts you will have limited options of investments to choose from.
• Traditional 401(k) 
  • Your contributions to the plan are made with pre-tax dollars.
  • The contributions grow tax deferred, meaning you will pay taxes when you take the money out.
  • If you withdraw before age 59 ½ you will pay taxes and a 10% penalty. 
  • At age 70 ½ you will be forced to start making withdrawals from your traditional 401(k)
• Roth 401(k)
  • Your contributions to the plan are made with after-tax dollars however the money the employer puts in is made with pre-tax dollars. 
  • Your after-tax contributions grow tax-free but the money the employer contributes will be subject to taxes similar to a traditional 401(k).
  • If the money is withdrawn early (before age 59 ½) without a qualifying event, it is subject to a penalty.
  • You are not required to withdraw by a certain age.
• There are options of a 401(k) loan on some plans.
• Some employers offer a match program where they will match the percent of income you put into the plan. 

IRAs- Individual Retirement Account

• This is a retirement account you open on your own.
• With an IRA, you get to choose what it is invested in. 
• You get to make all of the decisions on investments or hire someone to do it for you. 
• There will usually be more investment options than the employer-sponsored retirement plans.

• The contribution limit for IRAs in 2019 is $6,000 ($7,000 if you are over 50).

• Traditional IRA
  • Your contributions can be deducted on your tax return, but the amount you can deduct may be limited if you have a retirement plan at work. 
  • You will be taxed when the money is withdrawn. 
  • If you pull the money out early (before age 59 ½), you will pay taxes and a 10% penalty.
  • At age 70 ½ you will be forced to start making withdrawals from your traditional 

• Roth IRA
  • Your contributions are made with after-tax dollars. 
  • The money grows tax-free so you will not have to pay taxes when you take it out assuming you meet the criteria.
    • If you are over age 59 ½ and it’s been 5 years since your first contribution, you can withdraw without paying taxes or penalties.
    • If you are under 59 ½ but it’s been 5 years since the first contribution, you can withdraw your contributions without penalty but will pay taxes on your earnings. 
      • There are some exceptions to this, such as withdrawing for first-time home purchase or education.
  • You are not required to withdrawal at a certain age. 
  • You are only allowed to contribute to a Roth IRA if your income is below a certain threshold. For 2019, filing single, $122,000 ($137,000) and married filing jointly $193,000 and ends at $203,000.

Hope this information helps you make a Centsible Plan to save for retirement. There is no one size fits all for retirement. For personalized advice, see a financial professional.

Disclaimer: The information on this blog is for educational and informational purposes only. We recommend you consult with a financial professional before making any financial decisions.