Choose a Retirement Plan and Open Your Account
Sure, you can put money into a basic savings account, but it won’t really grow there. Because of their easy accessibility combined with higher interest rates than typical bank savings, high-yield savings accounts are often recommended for shorter-term savings and emergency funds. But in order to build the necessary funds to sustain yourself after retirement, you’ll need to see some serious returns. Some of the best retirement plans tend to be tax-advantaged investment accounts such as a 401(k) or Individual Retirement Arrangement (IRA) because they have the wealth-building benefit of compounded interest.
- 401(k). A 401(k) is an employer-sponsored retirement account. If your employer offers a 401(k), use it. Especially if they match your contributions. For example, if your employer contributes a dollar for every dollar you save for up to 5% of your pay, try to contribute the full 5% – that employer match is money you wouldn’t otherwise get.
- IRA. If you don’t have access to a 401(k), an IRA is an effective alternative. There are a few types of IRAs, but unless you’re a small business owner or self-employed, the two main types to consider are the traditional IRA and the Roth IRA. The biggest difference between the two types is when you are taxed. With a traditional IRA, contributions are tax deductible when you make them, but you pay taxes when you withdraw funds later. With a Roth IRA, you deposit after-tax money, so it’s not tax deductible. However, you don’t pay tax on withdrawals.
While your employer must set up a 401(k), you can open up an IRA through a bank, brokerage, investment company, or even online. If you’re not sure which type of plan to pick, a financial advisor may be able to help you choose the best retirement strategy for your needs. Fortunately, retirement accounts are pretty flexible. If you don’t have a job with a 401(k) benefit but expect to in the future, you can start an IRA. In fact, you can have both an IRA and a 401(k). You can even “rollover” an IRA into a 401(k) – and vice versa. In plain English, that means converting from one to the other.
For a deeper dive into different retirement plan options, read “Explaining 6 Key Types of Retirement Plans.”