Whether you’re putting money in or taking money out of a 401k or IRA, understanding how retirement accounts work, the different rules around each, and how these tools fit into your retirement plan has become a big part of meeting your retirement goals.
Retirement accounts are the single greatest savings tools around because of the tax benefits. Delaying taxes on dividends, capital gains, and income lets your savings grow faster without taking a tax hit each year. That tax savings compounds in a huge way when combined with a long-term horizon. And the tax deduction, if you qualify, has the added bonus of lowering your tax bill. All you need is a basic understanding of how retirement accounts work to turn the tax code into more savings for you.
If you’re just starting out, these resources will get you up to speed on the power that saving, compounding, and tax-free growth have on your retirement savings:
- The Beginner’s Guide to Tax Efficient Investing
- Compound Interest: The Accelerating Power of Money
- A Simple Plan to Save More Money
It starts with knowing which account is best for your retirement savings. There are differing opinions about how to best prioritize your money across the different retirement accounts, but a smart saver uses more than one.
1. Guide to Your 401k Plan
A 401k is one type of retirement plan. If you work for a company, there’s a good chance they offer a 401k plan. If so, it will be your primary savings tool because it allows you to save three times more than an individual retirement account plus any match offered by your company. That’s on top of the tax deduction you get each year for the money you put in.
If you have a good understanding how your 401k works, check out these tips and tricks on boosting your retirement savings:
- How Much Money Do You Need To Retire?
- How to Start an Automatic Investment Plan
- Best Options for Your 401k Rollover
2. Guide to Your Traditional IRA
There are several types of IRAs. The two most popular are the traditional IRA and Roth IRA covered next. Both are great secondary savings tools but offer different tax advantages. The main benefit to a traditional IRA is the tax deduction on money you put in the account each year in exchange for being taxed when you take it out.
For those that understand the rules take a look at these ideas to get even more out of your retirement plans:
- Saver’s Credit: Extra Credit for Retirement Savings
- Ways to Avoid the IRA Early Withdrawal Penalty
- All The IRA Investment Options For Your Money
3. Guide to Your Roth IRA
The Roth IRA is the last type of retirement account. Unlike the 401k and traditional IRA, you pay taxes on money you put in a Roth, so you don’t pay when you take it out in retirement. This allows you to diversify between taxable and tax-free retirement income when you need it the most.
For more retirement savings tips, check out these other resources: