Investing for Retirement: What Account Should You Choose?

Paolo Cogliati | Published July 7, 2020 | Updated July 22, 2020 | 5 min read

Dance like you don't have to care about Social Security
Dance like you don't have to care about Social Security

Welcome to being an adult. Truly, this is it: planning for your future adult self. 

With the average retirement age sitting at 62, either by choice, layoffs, or health issues - the U.S government is notoriously bad at helping you out after that age. 

In fact, this is essentially all they offer if you’re not looking to live paycheck to paycheck - tax-advantaged accounts. So let’s help you decide which one to start investing in. 

The Important Details

Investing with tax-advantaged accounts can provide benefits, both in terms of how much you deduct from your taxes yearly, and how much you’re taxed when you withdraw money from your account.

Be aware that you should not access these funds until you are 59 ½ years old, and often, withdrawing earlier will create penalties. However, there are exceptions with some of these accounts - such as for medical emergencies, tuition, first home, etc., so it’s essential to consider each person’s situation case-by-case.

Employer-Sponsored Accounts

The most popular employer-sponsored accounts are a 401(k), a 403(B), and a 457. The key benefit of these accounts is that it allows employees to save for retirement by directly connecting their paychecks to their employer-sponsored brokerage.

It’s not uncommon for employers in the U.S to match what you put up to certain limits, adding a much-appreciated boost to your retirement. 

For vehicles like a Traditional 401(k), you typically put part of your pre-tax income into these accounts, allowing the money to grow at full value. Each future withdrawal that you make will then be taxed as if it were income. 

As of now (in 2020), per the IRS, you can contribute up to $19,500, not including what your employer adds! 

If investing in employer-sponsored retirement accounts is in your budget and the right step, then take advantage of your company’s matching plan! It’s literally free money you’d otherwise leave behind. 

Traditional IRA & Roth IRA

If your company doesn’t offer an employer-sponsored account, then these are usually the go-to accounts for retirement investing. 

A Traditional IRA is similar to a Traditional 401(k) when it comes to being taxed. Any money you add to the IRA will not count towards your income for that year, meaning your taxes are delayed. However, the government is going to want to get its tax money back when you retire as you start withdrawing from the account. 

A Roth IRA on the other hand works in reverse. You pay your income tax the year you contribute, so when you withdraw it during retirement it’s tax-free with some conditions. That means no income tax and no capital gains tax when you take money out. But no tax deductions when you put money in. 

A cool benefit is that you can actually take money out before your retirement age in case of these specific needs : 

  • Unreimbursed medical expenses
  • Health insurance while unemployed
  • Permanent disability 
  • Higher education expenses (tuition, books, fees, etc)
  • Inherited IRA
  • Buy, build, or rebuild a first-time home 
  • IRS levy’s (paying back taxes) 
  • Active duty 

As of 2020, according to the IRS, you can only open a Roth IRA if your income is below $139,000/year - or $206,000 jointly with a partner. If you earn more than this bracket, first of all, congrats, second of all a Traditional IRA is what you would choose. 

529 College Savings Plans

These accounts provide tax benefits for parents saving for college. You can even open one while single and swiping furiously on Tinder - so definitely give it a thought if you’re in good financial shape and are looking to grow that family lineage. 

It works similarly to a Roth IRA, with all withdrawals being tax-free as long as money is being used for higher-education expenses. 

Some states offer extra benefits, so make sure you research this part based on where you live. 

In Conclusion

Whatever you choose, keep in mind that most reputable brokers now charge zero commission fees. These hidden costs can eat away at profits, so don’t put up with them! 

Almost all brokers offer these tax-advantaged accounts. So pick the one you like and start investing.

We do recommend keeping a diversified portfolio. This can be typically achieved by buying Index Funds or ETF’s — which essentially allow you to own multiple companies in the shape of a single stock. They typically also come with dividends, which can be re-invested automatically into your portfolio, further increasing growth. 

Make sure you read up about ETF’s before you press the buy button! 

Until next time, keep on prospering! 

Disclaimer: This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. All investments involve risks, including possible loss of principal. There is no assurance that any investment strategy will be successful. Investing in retirement accounts does not ensure a profit or guarantee against a loss. 

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