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Day 16: What’s An IRA/401(k) And Why You...

posted by: LearnVest
at 2:28pm on: March 8, 2010
REAL WORLD > Money Matters
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The topic of retirement is daunting, we know. So deep breath, we’ll make it easy! Retirement is expensive. We’re not just talking about fancy vacations; we’re talking about critical expenses like proper healthcare and visits to your children.

Learn:
Experts suggest that the amount you’re estimated to need for paying bills during retirement equals about 70% of whatever you made in the years before that. Saving early makes a real difference.


If you contributed to a Roth IRA every year starting at age 20, you could retire as a millionaire! Here’s why time is your biggest asset: Chelsea and Katie both put in $24,000 over the years, but Chelsea began putting in money ($50 per month) at age 25 while Katie began saving ($100 per month) at age 45. Even though they both put in the same total amount, by the time they are 65, you can see that Chelsea has almost twice as much money to retire with as Katie. Thanks to compounding interest, Chelsea’s savings have earned more interest on interest over time than Katie’s. 

We'll say it again, starting early really matters. Time and compounding interest are everything to you. Retirement IS a discussion you should be having today.

Once you’ve committed to saving money for retirement, the next question is what’s the best type of account to save it in? Today, we’ll walk you through the three main retirement vehicles, and tomorrow we’ll figure out which one is best for you. 

1. 401(k) 
An employer-sponsored retirement account that’s funded by contributions from your paycheck. 

2. Traditional IRA
Anyone who has income can open a Traditional IRA. Similar to a 401(k), your contribution is tax-deductible and grows tax-deferred until retirement. 

3. Roth IRA
A Roth IRA is considered “tax exempt” meaning you put money in that you have already paid taxes on—so your Roth investment grows tax-free. 

Click here for more info on these different accounts.

In a year, you can contribute to both a 401(k) and an IRA (Roth or Traditional). We will talk about this more tomorrow and whether it makes sense for you. For now, click here for a summary of the three accounts.

Calculate how much you would have for retirement if you started saving today with LearnVest’s Tools and Calculators. The results are pretty exciting!
Action Time: 5 minutes

Take our quick quiz on the differences between retirement savings vehicles.
Action Time: 5 minutes

True or False?
1. The maximum you can contribute to a Roth IRA is $5,000 in the year 2010.

2. Contributions to a Roth IRA are not tax-deductible, but your money grows tax-free.

3. If you can’t afford to save a lot of money for retirement now, you should wait until you feel more stable, and then just make bigger contributions to your account.

4. You can only open a 401(k) if your employer provides the option.

5. You can contribute to both an IRA (Roth or Traditional) and a 401k in the same year for a total of $21,500 in 2010.

Answers: 1. True; 2. True; 3. False; 4. True; 5. True

 

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