Planning for your retirement can be overwhelming. With all the different individual retirement accounts and 401k plans available, it's hard to know where to start and which one is right for you.
Finding the right plan is a huge, lifelong decision that you should start investing in now - whether you're in your early 20's or reaching 50. Here's the benefits and disadvantages of both.
How a 401k Works
401k plans are offered by your employers to help you save money for retirement. Your employer will take out a percentage of your paycheck and place it in your 401k account each month. Some employers will even match your monthly fee. They can also offer you a tax-free investment plan.
The IRS only allows you to contribute a maximum of $18,000 yearly to your account, although that amount can vary if you're over 50. It's up to your employer to determine how much you can invest each year.
401k's are a great part of employee benefit packages, but there can be some set backs if you decide to quit. You have the option to cash out your 401k, but you'll probably lose a lot of the money you saved. Or, you can roll it over into your new employers 401k package, or your own personal individual retirement account.
Why an IRA?
Sometimes keeping up with a 401k retirement plan can be exhausting, especially if you've changed jobs in a short amount of time. If you're a job hopper, traveler, or you want to avoid dealing with 401k rollovers, you should start an IRA. This is an individual retirement account that can be opened by anyone, at anytime, whether they're employed or not.
You can also invest in a Roth IRA, which is very similar to a traditional individual retirement account, but offers different tax benefits. With a traditional individual retirement account, the money you put in isn't taxed. A Roth IRA is taxed, but once you take the money out in retirement, it isn't taxed.
Both plans are flexible and will let you keep your account for as long as you need. You can also withdraw from them at any time. This is great for parents who want to pass down their inheritance to their children.
You can't, however, deposit as much money into these accounts as you could a 401k. Both individual retirement accounts cap out at $5,500 for young adults and $6,500 for adults over 50.
At Telcoe Federal Credit Union, you can start an IRA account with no minimum balance or setup fees. We're the best local credit union in the state, so click here to start your account today!