A 401(k) is a savings account offered by employers to give employees a tax break on money for retirement. With a traditional 401(k), contributions are taken out of your paycheck before taxes. If you struggle with saving, this can be nice since the money is deducted before you ever see it.
Another perk of the 401(k) is that many employers will match what you contribute, up to about 6% of your salary. Employer contribution matches vary, so check with your company to guarantee you’re contributing enough to get the match.
Anyone with earned income under the age of 70 ½ can make contributions to a traditional IRA. You receive tax deductions on your contributions each year you put money into your account.
However, you’re responsible for paying taxes once you make withdrawals at the eligible age (59 ½). If you prefer an account that doesn’t have the withdrawal rules and regulations of a traditional IRA, you may want to consider a Roth account.
A major difference between a traditional and Roth IRA is the type of tax breaks each one offers. While you don’t get tax deductions from contributions to a Roth IRA, you also won’t pay taxes on earnings once you reach retirement age. Read more about the differences between a traditional and Roth IRA here.
A Note for the Self-Employed
As an entrepreneur, investing for retirement sometimes becomes less of a priority while growing your business. Saving for retirement is just as important for those who are self-employed. Although you won’t be eligible for a 401(k), you can still contribute to a traditional, Roth, or SEP IRA.
Don’t Be Overwhelmed
Understanding retirement accounts can be daunting, so take things one step at a time. Just like you did your research and put together a plan to get a job, make plans to figure out the best type of retirement account for you. It may be a headache, but you’ll thank yourself years from now, when you’re settling into a comfortable retirement.