Money Girl explains different types of retirement accounts you can use to grow a healthy nest egg.
This is the second episode in a 2-part series about 6 different retirement plans created for individuals, employees, and businesses. In Part 1, I covered the first 3 accounts—so make sure to go back and check that out.
Today we’ll discuss the remaining 3 plans that make it easy to set aside money for retirement and slash your tax bill.
Here’s a brief review of the first 3 types of retirement accounts that I covered in Part 1 of this series:
Type #1: Traditional IRA
A traditional IRA is a plan for individuals only. Contributions to the account are never taxed until you take withdrawals during retirement.
Type #2: Roth IRA
A Roth IRA is also a plan that’s only for individuals. Its major difference from a traditional IRA is that contributions are taxed upfront. However, withdrawals of contributions and earnings during retirement are tax free.
For 2013, you can contribute a total of $5,500 to a Roth IRA, a traditional IRA, or to a combination of both.
Type #3: 401(k) Plan
A 401(k) is a pre-tax plan for individuals—however, it can only be established by an employer. Just like with a traditional IRA, your contributions and earnings are never taxed until you take withdrawals during retirement. Some employers may also offer a Roth 401(k) option, where you make after-tax contributions that grow completely tax free.
For 2013, your total contribution to any type of 401(k) can’t exceed $17,500 or $23,000 if you’re age 50 or older. That’s in addition to any amounts your employer may contribute on your behalf.
The last 3 types of retirement accounts that we’ll cover can be used by businesses or those who are self-employed: