01-01-2021, 11:21 AM
Let's talk about Retirement Investing
What are the different types of retirement accounts?
The two main types of retirement accounts are employer-sponsored and self-directed. Of course, there is some overlap if you are self-employed; this question assumes that you aren't.
What are the different types of tax treatments of retirement accounts?
A "traditional" retirement account is pre-tax: the money you put in doesn't get taxed as income. However, the money you withdraw in retirement is treated as income that year.
A "Roth" retirement account is post-tax: the money is taxed in the year you earned it. However, withdrawn money in retirement is not treated as income.
In both cases, withdrawals in retirement are those made after the year in which you turn 59.5.
Note that Roth is named after a person and is not an acronym; the correct usage for an IRA (for example) is a "Roth IRA," not a "ROTH IRA."
I have money I am able to invest and I want to use it towards retirement. How should I invest it?
As a general rule, it is typically advised to contribute in this format:
This is not a hard-and-fast rule; for example, if your income is such that you cannot use either form of IRA (and if, for whatever reason, you aren't going to use the backdoor Roth IRA loophole), you won't use the second step. Alternately, if your workplace has better mutual funds than you can get in your IRA, and that is your preferred investment vehicle, you might want to max that before using the IRA.
I just left my employer. What should I do with my workplace plan?
There are four options here. Note that not every option is always available - for example, not every employer plan allows you to keep it as such, and not every employer plan accepts funds to be brought in from another plan. The process of moving money from one retirement account to another is known as a "rollover."
Cheers
DanKind Regards R
What are the different types of retirement accounts?
The two main types of retirement accounts are employer-sponsored and self-directed. Of course, there is some overlap if you are self-employed; this question assumes that you aren't.
- An employer-sponsored plan is provided to you at work; how you qualify to be able to contribute to the plan is dependent on your employer. The most common employer plan type is a 401(k). Typically, you can only contribute to these via paycheck deductions, not by transferring money. Of course, there's no reason you can't use the money already in your bank account for expenses and deduct that much more from your paycheck if you would like to do so.
Many employers will "match" some of your contributions: if you put a portion of your paycheck into your retirement savings, they'll put a similar amount in.
In 2020, the limit is $19,500 for individual contributions to these accounts. The match from your employer does not count towards this limit. The individual limit is higher if you're over 50.
- An Individual Retirement Account (IRA) is one that you provide, independent of an employer. The limit in 2020 for contributions is $6000 (higher if you're over 50).
What are the different types of tax treatments of retirement accounts?
A "traditional" retirement account is pre-tax: the money you put in doesn't get taxed as income. However, the money you withdraw in retirement is treated as income that year.
A "Roth" retirement account is post-tax: the money is taxed in the year you earned it. However, withdrawn money in retirement is not treated as income.
In both cases, withdrawals in retirement are those made after the year in which you turn 59.5.
Note that Roth is named after a person and is not an acronym; the correct usage for an IRA (for example) is a "Roth IRA," not a "ROTH IRA."
I have money I am able to invest and I want to use it towards retirement. How should I invest it?
As a general rule, it is typically advised to contribute in this format:
- Contribute to your workplace plan up to the employer match.
- Contribute to your desired IRA up to the limit.
- Contribute to your workplace plan up to the IRS limit.
This is not a hard-and-fast rule; for example, if your income is such that you cannot use either form of IRA (and if, for whatever reason, you aren't going to use the backdoor Roth IRA loophole), you won't use the second step. Alternately, if your workplace has better mutual funds than you can get in your IRA, and that is your preferred investment vehicle, you might want to max that before using the IRA.
I just left my employer. What should I do with my workplace plan?
There are four options here. Note that not every option is always available - for example, not every employer plan allows you to keep it as such, and not every employer plan accepts funds to be brought in from another plan. The process of moving money from one retirement account to another is known as a "rollover."
- Roll the plan to an IRA. It is typically advised to keep the money within the same tax treatment - move traditional 401(k) funds to a traditional IRA (sometimes labeled a "rollover IRA") and Roth 401(k) to a Roth IRA. This is the most common choice.
- Leave it where it is. If your old plan has great funds, or if your new plan doesn't accept rollovers and you would like to avoid having a traditional IRA, this is typically the choice used.
- Move the funds to your new employer plan. This is typically done if the new plan has fantastic fund choices.
- Cash out the money; note that this involves paying tax on the money brought out and early withdrawal penalties. This is almost always a bad decision.
Cheers
DanKind Regards R