Things To Know About Different Retirement Funds

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Retirement funds aren’t as complicated as we make them out to be. It’s easy to find a list of excuses to avoid allocating precious funds towards them, but in reality, no matter the type, they all fundamentally serve the same purpose - make your money, make money. 

Typically, retirement funds are an accrual of many people’s contributing funds that are invested across many different things and a mix of different kinds of investments. While they might have different names and might appear at different phases of your life, they’re all intended to do the same thing but will impact taxes and how you’ll be able to access your money in the future. 

Here’s what you should know about the top 4 different types of retirement funds: 


401K 

The name we’ve all heard but rarely know TF it’s about. Commonly provided by employers that will sometimes match a percentage of what you contribute, you’re easily able to allocate a percentage of each paycheck towards your balance. 

Generally, investment gains are not taxed until you draw money for retirement. If you withdraw before 59 ½ years of age, you’ll likely be subject to a 10% penalty fee on top of being subject to state and federal taxes. 

The great thing about these is that employers will sometimes match up to 6% of your contributions, making it even easier to grow those funds. At the same time, as per federal regulation, you’re only allowed to contribute up to $19,500 a year. 

401K Recap:

  • No taxes paid until withdrawal
  • Can’t withdraw until age 59 ½ 
  • Max annual contribution is $19,500 annually
  • Opportunity to have matching employer contributions

IRA (Individual Retirement Accounts)

Known as a tax-favored retirement fund that gives you control over where and how your money is invested. You pay income taxes on money going in and on gains, but when you're ready to withdraw at age 59 1/2, you aren’t subject to taxes on anything other than capital gains. Contribution limits are less than other fund types, capping at $6,000. This makes IRAs a great option if you’ve maxed out an employer 401k. 

Just like a 401k, you’re unable to withdraw funds until the age of 59 ½ and you’ll be subject to a 10% penalty with early withdrawal plus state and federal taxes. While there are rigid rules around “early distributions”, you don’t have to pay taxes on gains annually, so you’ll accrue more money quicker. You do however pay taxes on gains once withdrawn. You can also usually apply contributions as tax write-offs. 

IRA Recap: 

  • Eligible for withdrawals at age 59 ½
  • Maximum annual contribution $6,000
  • Pay taxes on gains once withdrawn
  • 10% penalty for early withdrawal

Roth IRAs

A Roth IRA, unlike a traditional IRA, allows you to contribute after-tax dollars meaning that you’ll never be required to pay taxes on those contributions again. 

Roth IRAs are also much more accessible than most retirement funds. With no age withdrawal restrictions, it requires a minimum of 5 years having passed since your first contribution. This makes a Roth IRA a great place to keep extra money with a higher savings yield than a savings account would provide. 

Roth and Traditional IRAs don’t allow you to contribute a combined $6000 annually.

Roth IRA Recap: 

  • No age withdrawal restrictions, accessible after 5 years since the first contribution
  • The maximum contribution across all IRAs is $6000
  • After-tax contributions, so you won’t pay taxes when withdrawing

Roth 401K 

Created in 2006, a Roth 401k has many similarities to traditional, employer-offered 401k. Contributions are contributed from after-tax dollars and doesn’t have an income limit. Money that goes in is never taxed again, so long as you keep money invested in the plan for a minimum of 5 years. 

Withdrawals are the same as a Roth IRA but penalties mirror a traditional IRA. 

Roth 401k Recap:

  • No age withdrawal restrictions, accessible after 5 years since the first contribution
  • No contribution limits
  • After-tax dollars, not subject to taxes so long as money remains for 5 years

The best option for you is ultimately what fits in line with your financial goals. While you should see what's available to you and the different resources now available, the general rule of thumb is, if you have access to a matching employer fund, take advantage of it because it's free money that will grow more quickly than contributions you've put in on your own. 

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