Retirement Accounts

Many investment accounts typically have two types, Traditional and Roth. Knowing the difference between the two will help you not become overwhelmed with the many investment account options out there.

• Traditional - Contributions are made with pre-tax dollars that will lower your taxable income now, but you will pay taxes later in retirement when you withdraw from this account.

• Roth - Contributions are made with after-tax dollars, so you pay taxes on that money now and then you receive tax-free withdrawals in retirement.

Overall, we recommend Roth accounts for most people because of the tax timing on the accounts. It may be tempting to delay paying taxes so you can get slightly more in your paycheck now, but no one can know how the tax brackets or tax percentages will change in the future, especially if you are still decades away from retirement. 

While a traditional account gives you a tax deduction now, the larger tax benefit typically comes from Roth account because these are investment accounts, your money will (hopefully) be growing, which means the amount later will be greater than the amount that you have in the account now. Paying taxes on the greater amount could lead to higher taxes paid or placing you in a higher income tax bracket, which leads to a higher tax percentage on your income.

For some high-net-worth investors, it may make sense to have a substantial percentage of assets saved in pre-tax retirement accounts to maximize the arbitrage opportunity created by the progressive income tax structure.

An individual retirement account (IRA) is a savings account with tax advantages that individuals can use to save and invest long-term.

Money held in an IRA usually can't be withdrawn before age 59½ without incurring a hefty tax penalty of 10% of the amount withdrawn. IRAs are meant to be long-term retirement savings accounts. If you take money out early, you defeat that purpose by diminishing your retirement assets.

You can open an IRA through a bank, an investment company, an online brokerage, or a personal broker. 

A 401(k) plan is a company-sponsored retirement account that employees can contribute income, while employers may match contributions.

It allows employees the benefit of having retirement savings taken out of their paychecks before taxes. If your workplace offers a 401(k), find out if they also offer a match as well, as this can double your contribution amount in some cases.

Company-sponsored retirement accounts are similar to IRAs in how they invest and what they help achieve for the investor, however they are tied to the company, and would need to be transferred to the new company's broker if the employee were to change employers. IRAs on the other had are tied to the investor personally, so you will have it no matter where you work.

These accounts are not exclusive, you can have an IRA as well as a company-sponsored account.

A 403(b) plan is a retirement account designed for certain employees of public schools and other tax-exempt organizations such as non-profits. 

This may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians. 

The plan is similar to a 401(k) in that it allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for the employer to match part of the employee's contribution. 

A thrift savings plan (TSP) is a type of retirement investment program open only to federal employees and members of the uniformed services.

The plan is similar to a 401(k) in that it allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for a match of the participants contribution.