ok. let’s keep this as simple as possible.
what is an IRA? answer: it stands for “individual retirement account.” it’s an account you open to save money for retirement. the current max for most people is $5000/year and you can’t touch the money ’til you’re 59 1/2.
what is a 401K? answer: it’s a retirement account through your job that some employers offer. and some companies will offer a “match,” which is money they deposit into the account if you put money into it (usually only a small percentage of what you contribute).
how does traditional compare to ROTH? answer: traditional came first and means the money in either type of account (IRA or 401K) won’t be taxed until you make withdrawals in retirement. then you’ll pay taxes on all of it, the original money you put in and all of the growth of that money throughout the years.
ROTH contributions are not tax deductible or “pre tax money” (as is the case with tradtional IRA and 401K contributions), but with ROTH, in retirement every penny you withdraw will be 100% tax free, your original contributions as well as all of the growth of the money (i love this option).
you can have both a 401K (if your employer offers one) and an IRA. also, if you leave a job, you can “roll over” the money from your 401K and move it into your IRA.
there are some more complicated restrictions and rules, but let’s not worry about that right now. instead, open one if you don’t have one already and contribute as much as you can.
if it feels overwhelming, one super simple way to start is to use my $10 trick (see “pay yourself first and the $10 trick” post) to move money monthly monthly into an IRA. just open one at your existing institution or (as i recommend) at Vanguard (see the link on my homepage).
do any of us wanna worry about money when we’re in retirement?! no. so get going. the earlier you start the more chance you have for growth (we’ll talk about the power of compounding interest later). and if you’re worried that you haven’t started soon enough, forget it. we can’t do anything about the past. just do your personal best and start now. if you already have an account, try to contribute more, even if just a little.
’til next time: here’s to a better financial future for all of us.
moneymanmichael 