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What is the best way to save for retirement? Roth, IRA, 401k? They are all confusing to me.

I am getting a late start with retirement savings. I want to get caught up as soon as possible after I graduate from my BSN program. #retirement #financial-planning #nursing


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David’s Answer

Hello Kristen,

There are different retirement vehicles and each have their pros and cons. Choosing which retirement vehicle depends on your expected marginal tax bracket during retirement. I typically recommend investing in all, including a taxable account (brokerage account), but how much in each varies. Often, your tax bracket may vary depending on your retirement income for a given year. Things to consider are what age you retire, any part-time employment income during retirement, when you take your social security benefits (up to 80% may be taxable), and retirement goals.

Traditional IRA/401(k) contributions are made with pre-tax dollars and are tax deductible, withdrawals are taxable.
Roth IRA contributions are made with after-tax dollars and are NOT tax deductible, withdrawals are tax-free.
Taxable accounts (brokerage accounts) are made with after-tax dollars and are NOT tax deductible, withdrawals are taxed only on the portion that was growth, if there is no growth in the account then that means the withdrawals are tax-free (return of principal).

In years of higher tax brackets, you may want to first withdraw from a Roth IRA, then taxable account, then traditional IRA/401(k).
In years of lower tax brackets, you may want to first withdraw from a traditional IRA/401(k), then taxable account, then Roth IRA.
In years of middle tax bracket (this could come about if you are married and only one spouse is taking social security and not the other, or if you are married and one spouse is withdrawing extra for a new vehicle and the other is not, etc.), you may want to first withdraw from a taxable account, then traditional IRA/401(k), then Roth IRA.

Hope this helps and best of luck!

DSM

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Andrew’s Answer

Hi Kristen,


There is really no true 'best' way to save for retirement, but saving early and saving often will help get you started on the right track. IRA's (Individual Retirement Account) and 401ks are financial instruments designed to help you save money and earn interest on that money throughout your savings period. The primary difference between an IRA and a 401k is that a 401k is usually offered through an employer as part of a benefits package, and an IRA is something that almost anyone can open up on their own. I have given brief descriptions for these below:


401k:

As stated above, a 401k is a type of retirement plan that eligible employees may make contributions to on a post-tax and/or pretax basis. Some employers will then also "match" the employee contribution as an added boost or 'incentive' to the employee (matches usually range between 3-6% of the contribution). The idea is that over time, a specified percentage or amount is withheld from your paycheck automatically each period and 'deposited' into your 401k. Over time, the amount of money in your 401k will grow and accumulate interest on investment returns until you reach the legal age to begin withdrawing these funds (59.5 years old). You also have the option to contribute your money on a pre-tax or post tax basis. There are a variety of pros and cons to pre tax vs. post tax, it just depends on if you would rather pay your taxes now, or when you withdraw your funds in the future.


IRA:

Unlike a 401k, an IRA is a financial savings instrument that any qualifying individual can go out and 'get in the marketplace'. There are a variety of financial institutions (think investment companies) that offer various types of IRAs that you can choose from. The two basic types of IRAs that are suitable for beginner savers are ROTH IRAs and Traditional IRAs. The main difference between these two types are how they are treated for tax purposes; ROTH IRA contributions are taxed upon entrance to the fund and Traditional IRA contributions are not taxed initially, but taxed upon withdrawal during retirement. IRAs come with different types of limitations than a 401k - most of them revolve around monetary limitations. As of 2018, you may only contribute a total of $5,500 a year to your ROTH or Traditional IRA and after you earn above a certain amount of money, you may not be eligible to open or contribute to an IRA (that's a good problem to have!).


These are just very high level overviews of 401ks and IRAs, but the biggest tip that I can give is to start saving early and save often!.

Andrew recommends the following next steps:

Develop a savings plan and figure out what works best for you
Saved!
If you are still in the process of looking for/interviewing for a job, figure out what kind of 401k benefits the company may or may not offer
Saved!
Do more research on the different types of IRAs and what kind of investment companies offer them
Saved!

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Gisella’s Answer

I work in the Retirement Industry and one of the major issues I see is people using their retirement account as a "short -term savings" account. You must remember that your retirement savings are long-term, and should avoid touching it until retirement. Other big purchases should be funded by a separate savings account for that purpose (house, vacations, travel, weddings, etc.). Emergencies due exist, but the examples mentioned before are not emergencies and should be planned accordingly. Also, even though loans might be available through your 401k account and you pay yourself back, you, essentially, will be paying double taxes on the interest as the interest grow tax deferred.
Definitely take advantage on an employer's or plan sponsor account (401K, 457, 403b, etc.), even if they don't offer a match you will be saving for your retirement. And by doing so with contributions from every pay period, your money grows with compounded interests and when deducted directly from your paycheck, you won't miss it from your bank account.
These retirement accounts are based on investments, but mostly mutual funds, which mean they are not all invested in just one asset or company, but a variety of them. Make sure you have a diversified portfolio, some stocks, some bonds, some cash equivalents. How aggressive or moderate or conservative you are when it comes to risk taking depends on your own comfort level and your goals for the retirement years.

When it comes to Individual retirement accounts, the Roth IRA account (or Roth 401k, if offered by the plan) have a great benefit that others don't. Yes, you pay taxes on your contributions up front, and your interests grow tax -deferred, but if you don't touch your money until at least the age of 59 1/2 and only after being in the plan for 5 years, then all of those interests you have accumulated will be 100% free of taxes to you.

Good luck and start saving. Never too late to start.

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Douglas’s Answer

I would say the 401k option if you are employed and the company has a "company match". It  is free money that you can add to your 401 and anyone that does not take advantage of this is crazy! The last answer did a great job of providing the details! The only thing I will add is that some 401k's allow you the option to do "loans" to yourself in case you need to....which is great when it comes time to make a big purchase(like a home)...and you basically pay yourself back with payroll deductions and it is usually interest free.


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