Invest Today, Benefit Tomorrow
“You need to start saving for retirement.”
You will hear this advice preached at you from the beginning of your working years until the day you clean out your desk. While the advice is meant to be helpful, it can often leave us feeling guilty and confused. Guilty for having minimal retirement savings and confused about how to even begin saving.
There are many different types of investment accounts, and you may need to go over your specific situation with an investment advisor to determine which makes the most sense for you. However, the three most common types are listed here:
- Traditional IRA— An Individual Retirement Arrangement is a tax-deferred account. This means that any money contributed to a Traditional IRA is not taxed in the year that it is contributed to the account. Contributions then grow tax-free (gains and dividends in the account are not taxed) until the day that they are withdrawn. At that point, they are taxed at your ordinary income tax rate. This can be especially good if your post-retirement tax rate drops below your current rate.
- Roth IRA—This type of account is much like the traditional IRA in that gains and dividends in the account are not taxed. However, Roth IRA contributions are taxed in the year that they are made. The good news - withdrawals from Roth IRAs are tax-free in retirement, since the tax was already paid in the year contributed.
- Brokerage account—A brokerage account is not necessarily a retirement account, as they are not “tax advantaged” like IRAs and dividends and capital gains are taxed in the year they are realized. But they do allow an investor to buy stocks and bonds and grow their principal over time, much like the IRA accounts previously discussed. The advantage of this type of account is that the funds in the account can be accessed at any time, not just during retirement years. An investor would typically opt for a brokerage account in addition to another retirement savings vehicle, such as an IRA.
While there is much more to be said about these three kinds of accounts, recognizing that they are all great tools to be used in a comprehensive investment plan is a great start.
« Back to Learning Center