Thinking of retiring? Or are you considering your options when the time finally comes for you to retire? Here are some of the terms you need to familiarize yourself with when it comes to the types of retirement accounts you can choose from.
401(k)
This a special type of retirement plan which is offered by employers to you, their employee. A 401(k) will provide you the opportunity to put your money in mutual funds or stable value funds.
You can choose between taking compensation in cash or to putting a part to 401(k). The amount you defer is mostly non-taxable to you until you decide to withdraw or distribute from the plan.
As an investor, you will usually receive tax deduction once the account is funded. There are annual limits, employers will often match contributions, and you will not owe them any taxes until you start withdrawing from it.
The term 401(k) refers to the division of tax code it came from. There has been a rise of dubbed self-directed 401(k)s in the recent years. These allow an investor to buy individual bonds and stocks in the account.
Learn more about the different types of investments here.
403(b)
This works the same way 401(k) does. The major difference between the two is that a 403(b) is used by nonprofit companies, religious groups, government organizations and school districts. This is mostly beneficial to those who work in public schools and certain tax-exempt organizations.
Rollover IRA
(IRA: Individual Retirement Account)
When you decide to leave your employer, you will have the option to rollover your 401(k) balance, you can then choose to transfer your funds from your retirement account to a traditional IRA or Roth IRA. This can be done through either direct transfer or by a check written by the custodian of the distributing account to the holder who will be depositing the amount to the IRA.
The check made payable to you will have withheld taxes.
Roth IRA
(IRA: Individual Retirement Account)
This is a special type of account designation which is put on a custody account that provides incredible tax benefits while also restricting the amount you can then contribute to the account as well as the type of investments you can hold within it.
This is funded through post-tax income; it’s not possible to deduct contributions from your income taxes. Once you have done this, all of your future withdrawals under the Roth IRA regulations will be tax-free.
There you have the first part of the investment terms regarding the types of retirement accounts you need to know. There are still more terms that you have to familiarize yourself. There is no such thing as too much research when it comes to ensuring your future.
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