The 401(k) is probably the retirement savings account that everyone’s familiar with, and you probably have been told you need one, but many may not necessarily understand how it works. It’s offered to full-time employee at for-profit companies, and it’s one of the easiest ways to save for your golden years. You contribute to the account via payroll deductions at regular intervals. That is, you instruct your employer to withhold a certain amount from your paycheck and that pretax income goes into the account. As of last year, you can contribute up to $18,O00 a year. One of the best parts of it is that your company will sometimes match your contributions 1:1 up to a certain amount. Yup, you heard that right, it’s basically free money from your employer. The money then goes into an investment account that a professional will manage on your behalf, and that can be adjusted strategically. You will have a tax obligation on the money but not until you actually withdraw it, and this tax-deferred status is one of the hidden benefits of this type of retirement account.
While with a 401(k) you’re depositing pre-tax dollars, with a Roth IRA, you contribute after-tax dollars that old, future (but still handsome) you won’t be taxed on when you withdraw it, even though it’s been earning for decades. You can’t deduct your contributions on your taxes, though. A Roth IRA does have some restrictions as to who can open an account based on income, though. Single people making less than $131,000 are eligible to contribute, and married people who file taxes jointly have to make less than $183,000 combined. There are a ton of Roth IRA options and a myriad of tools on the web for research. To start, try these two articles from Nerd Wallet and Money Under 30, two of our favorite financial advice sites.
Like a 401(k), the money you put into a Traditional IRA is tax-deferred until you withdraw it, in most cases. If you earn taxable income and are under age 70½, you are eligible to contribute to a Traditional IRA. You can contribute even if you’re already part of a 401(k) through your employer, but income affects whether you can deduct your Traditional IRA contributions on your taxes, and there’s a cut-off that will only let you get a partial deduction. If you don’t have a 401(k) plan though, you can deduct your full contribution, regardless of your income. You can open one with any brokerage of your choosing and we highly recommend researching multiple providers if you’re interested.
Saving for retirement can be scary for someone who is self-employed, but options like the Solo 401(k) do exist. A plan like this is ideal for an entrepreneur who doesn’t have any employees or someone in the freelance business. You can choose from a traditional or a Roth version. With a traditional Solo 401(k), pre-tax money is contributed and taxes are paid down the road. The Roth option is for after-tax contributions and gets a tax-free withdrawal. You can set one up with an investment company that offers it.