The Best Ways To Save And Retire At An Early Age – Smarter Finance Journal

The Best Ways To Save And Retire At An Early Age

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retirement-plans

It’s not always something we think about, but planning for retirement is an important consideration in how we maintain our budgets. Setting money aside on a regular basis is the only way to ensure that, when the time in life comes that you’re ready to stop working, you’ll have the means to enjoy a happy and comfortable life.

In the past, Social Security has served as a safety net for the elderly and disabled, but the system is going through a transition with more money coming out than going in. Long-term projections have created uncertainty over the future of Social Security, so now it is more important than ever to take steps ensuring our long-term financial well-being.

For those who are unfamiliar, there are three basic types of retirement accounts that you can set up. Each has its own strengths, making them good fits for people in different situations. Let’s break down the differences between a 401K, an IRA, and a Roth IRA.

What is a 401k?

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A 401k is an employer-maintained retirement account. It is named after its section in the Internal Revenue Code (not because you’re likely to amass $401,000 by the time you retire, unfortunately). For government employees, the same plan is called a 401b.

Funding for a 401k can come from a variety of different sources, including employee salary deferrals, profit sharing plans and matching employer contributions. The last of those is a benefit offered to employees at many companies, wherein the worker sets aside a percentage of their salary (say, 5 percent) and the employer will match that percentage, doubling the money set aside.

Funds that are saved in a 401k account are tax-free until being withdrawn at a minimum age of 59.5 years old.

What is an IRA?

IRA stands for Individual Retirement Account. A traditional IRA is quite similar to a 401k, with the same basic framework, except this type is not maintained by an employer so it must be set up through a bank or brokerage firm. As such, employer-matching is not a benefit that you’ll find in an IRA.

Much like with a 401k, contributions to a standard IRA are not taxed until being withdrawn at a minimum age of 59.5 years old.

What is a Roth IRA?

A Roth IRA is the same as a traditional IRA in many ways, with one key difference: contributions to this fund are text when they are added, and not when they are withdrawn. This is beneficial because your contributions can grow and gain capital without being taxed. As with the two other types of retirement accounts, withdrawals cannot be made until the age of 59 and a half.

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