Investment and Retirement Accounts

As your retirement age grows closer, you undoubtedly want to know what type of account can give you the best return. There are various investment and retirement accounts you can put your money into, so how do you know which is the best option for you? At the end of the day, only you can decide which type of account is best for your personal situation. Before you make the decision, you need to inform yourself about the different types of investment and retirement accounts on offer. Different investment and retirement accounts have a large impact on your finances, so do not rush to decide on a plan before you consider all the options.

To help you navigate your way through the different types of accounts available, the following guide details basic simple-to-understand information about each one. There are investment accounts open to anyone, retirement accounts on offer to employees by their employers, plans for self-employed people and much more. Once you have selected an account, you can then start making contributions in order to live a comfortable and stress-free retirement.

What is an investment account?

An investment account is one of the most straightforward types of financial accounts. You deposit funds or securities directly into the account. A financial institution then holds these funds and securities. The objective of having an investment account is to gain long-term growth, capital preservation or income from the portfolio.

For example, you may use your investment accounts to set aside assets like bonds and stocks in order to give you an income during your retirement. This can be a good way of supplementing your pension in order to give you a higher standard of living once you retire.

What is a brokerage account?

A brokerage account is one of the most common and popular investment accounts. By depositing money into a brokerage account, you can purchase investments such as bonds, stocks and mutual funds. You can easily open a brokerage account with many online brokers, but be sure to shop around first in order to get the best one for you.

How do you know if a brokerage account is the right choice for you? If you want to buy and manage your own investments, then you need a brokerage account.

What types of retirement accounts are available?

There are various types of retirement accounts you can choose from. If you know nothing about the subject, then it may seem quite daunting trying to understand the technicalities of each one. To help you along the way, here is all you need to know about the basics of the most popular retirement accounts available.

Individual Retirement Account

An IRA allows you to contribute a particular amount each year and invest your contributions without having to pay tax on your annual investment gains. This means you see your investment gains grow more quickly compared to other investment options.

Although you can avoid paying tax to begin with, you do pay income taxes on the account’s money when you withdraw it during your retirement. You can use the money put into your IRA to invest in bonds, stocks, EFTs, mutual funds and other investment types. You are also able to buy and sell investments.

Be aware, if you want to cash out before your retirement age, then you typically pay a penalty fee. This is usually about 10 percent. You may have to pay federal and local taxes on top of the penalty fee.

Related Article: How to Deal with Stock Market Fluctuations as a Retiree

Roth IRAs are different from IRAs because you make contributions after tax. The good news is, you never have to pay tax again on money generated within a Roth IRA. You can also withdraw contributions from your Roth IRA before your retirement age without having to pay any penalty fees.

A Savings Incentive Match for Employees IRA, known as a SIMPLE IRA for short, is a retirement plan small companies typically offer to employees. Contributions for a SIMPLE IRA plan come from pre-tax salary withdrawals. The money remains tax-deferred until you reach retirement age.

An SEP IRA, which stands for a Simplified Employee Pension, is a retirement account for self-employed people who do not have anyone working for them. With an SEP IRA, you contribute a portion of your salary to the account. The maximum amount limits of contributions for this account are usually higher than other retirement accounts.

401(k) Plans

401(k) Plans are retirement accounts offered by workplaces as an employee benefit. With this type of account, you can contribute an amount of your pre-tax pay in a tax-deferred account. You can benefit from contributing pre-tax money because the amount your taxes are based on is lower.

Many employers match employee contributions with this type of account. This is generally up to six percent. You are missing out on a significant benefit if you do not contribute enough for the company to match it. As with an IRA, if you withdraw money from your 401(k) account before retirement age, then you may have to pay a penalty fee. This is typically 10 percent and it is subject to federal income taxes. It may be subject to state and local taxes as well.

Nonprofit employees and educators can take advantage of a 403(b) plan. 457(b) plans are on offer to government employees. Both of these are similar accounts to the 401(k) plan.

A Solo 401(k) account is for sole proprietors. Someone working with their spouse can use this account as well. You can make contributions as an employer and an employee with a Solo 401(k). The account works in a similar way to the normal 401(k) account.

There is also an account combining the features of the 401(k) plan and the Roth IRA, which is known as the Roth 401(k). Employers offer this type of account to employees, although not every employer offers the Roth 401(k). The contributions for this account come from your pay after tax, as opposed to from your pre-tax wages. As long as you meet specific requirements, you never have to pay tax again for the contributions and earnings in this type of account.

Related Article: Understanding 401(k) Contribution Limits

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