When it comes to investing towards retirement there are many account options. Each has different tax advantages that can have a big impact on your outcome and ability to reach your retirement goals. If you are wondering about the differences between a 401(k), an IRA, and more this article is for you.
Below is a quick overview of the account types and a short 5-minute video to help walk you through how they work. This information can help you choose which account is best for you.
Workplace Retirement Plans
These plans are only available if your employer offers one. They allow people to set aside the most money each year. Most workplace plans offer 25-40 investment options which may or may not be suited to your needs. However, the limited choices can also make a decision much easier for those managing their own money.
Here is a breakdown of each workplace retirement plan.
401(k) – Available to employees in the private sector.
403(b) – Available to employees in non-profit and non-governmental organizations
457(b) – Available to state and local government employees. Most Police Officers, Firefighters, and Paramedics are offered this option.
Thrift Savings Plan(TSP) – Available to federal government employees only.
Individual Retirement Accounts(IRA)
This account type is available to individuals with earned income through a W-2 or 1099 job. It is commonly referred to by its acronym IRA. This account type has lower contributions limits which are set by the IRS each year.
Traditional IRA – Allows you to deduct contributions on your income tax returning lowering your overall income.
Roth IRA – Contributions are not deducted on your income tax return. The money is completely tax-free for life.
Spousal IRA – This account is designed for couples with a stay at home parent, or when a spouse simply does not work. The working spouse contributes on behalf of the non-working spouse.
SEP or SIMPLE IRA – Are retirement plans offered by small employers that require more affordable solutions compared to 401(k)’s.
Taxable Accounts
This account type is available to anyone whether or not they are employed. Furthermore there are no annual contribution thresholds which means the sky is literally the limit!
This account type requires annual tax compliance with the IRS. The account is often referred to by a nickname such as trading, day trading account, and more.
If a Police Officer, Firefighter, or Paramedic purchases crypto currency on their own we see it is commonly held in this account type.
