An IRA stands for “individual retirement account” and this means you don’t have to have a retirement plan through your work in order to save, because you can set these up on your own. However, in order to save in an IRA, you must have earned income for the year. A Roth IRA is different from a Traditional IRA because you save money for retirement that is ‘after-tax’ money – this is money that you have already paid taxes on. Another difference is that a Roth IRA allows your retirement savings to grow tax-free – when you retire after age 59 1/2 and take qualified distributions, you don’t have to pay tax! This is the major advantage of a Roth IRA over a Traditional IRA. However, there are rules about who can contribute to a Roth IRA, so make sure to do your due diligence to see if you can contribute to one. In general, IRAs can be a great way to save for retirement either on their own or in combination with a workplace retirement plan.
An IRA stands for “individual retirement account” and this means you don’t have to have a retirement plan through your work in order to save, because you can set these up on your own. However, in order to save in an IRA, you must have earned income for the year. A Traditional IRA allows you to save money for retirement in a ‘tax-deferred’ manner – this means you don’t pay taxes on the money you keep in the account until you start taking money out for retirement. Once you take money out, then you will be taxed on the money. A major difference between a Traditional IRA and a Roth IRA is that anyone can contribute to a Traditional IRA. In general, IRAs can be a great way to save for retirement either on their own or in combination with a workplace retirement plan.
Retirement plans are a great way to save for when you eventually stop working, because they have special tax advantages over normal brokerage accounts. This is a great benefit that retirement plans provide because they give you the option to save for retirement in a ‘tax-deferred’ manner. This means you get to skip paying taxes on the money you save right now and will then pay the taxes later when you take it out in retirement. Alternatively, some workplace retirement plans allow you to save in a ‘Roth’ manner, meaning you pay taxes on the money you save now and then don’t have to pay taxes when you take it out in retirement. Doing your own research and talking with a financial advisor are usually the best ways to figure out which option is best for you. Workplace plans, like your 401(k), are also often excellent ways to save for retirement because employers often offer a ‘match.’ This means that they will contribute a certain percentage of your income as long as you also contribute at least a certain amount. For example, your company might contribute 5% of your salary to your 401(k), but only if you also contribute 5% of your salary to your 401(k). Many people think of this as ‘free money’ because it is money they give you in addition to your salary, but in truth, it is money you have earned as part of your deal working for a company. Another major benefit of saving money in your workplace retirement plan is that they have higher contribution limits than IRAs, or individual retirement accounts. The more you can save for retirement, the better!
Saving for college? A 529 plan is a great way to do so. A 529 plan is a ‘tax-advantaged’ plan, with the most common type being a savings plan. This plan allows your money to grow tax-free, as long as you use the money for qualified education expenses. The other type of 529 plan is a pre-paid tuition plan, which allows you to pay for the cost of a specific college now to lock-in current rates, if you think the cost of college will go up. In general, the 529 savings plan is much more flexible, since you can use the money to pay for education expenses at many different educational institutions.
A taxable brokerage is an account that you open at a brokerage firm, who holds your investments for you. Money in a taxable brokerage is, as the name implies, subject to tax. The investments will be subject to capital gains taxation if they grow (hopefully) and will be subject to capital losses if they lose money (bummer). Taxable brokerages come in many different forms, giving investors lots of options to invest in, such as stocks, bonds, mutual funds, ETFs, and so on. These accounts are different from your retirement accounts and allow you to take your money out at any time (although you will still have to pay taxes if you take the money out and it has grown). You can also put in as much or as little money as you want, unlike your retirement accounts.