Investing is a key component of retirement planning. While it’s important to build savings, simply depositing money into a low-interest savings account will not help to ensure money keeps pace with inflation. By investing for retirement, adults increase the chances that their money grows at a rate that will make it possible for them to maintain their standard of living even after they stop working.
There’s no shortage of investment vehicles available to people looking to build a retirement nest egg. The following are some of the more popular accounts people use to invest for retirement, and readers are urged to contact a local financial advisor with any questions about each plan.
Traditional individual retirement account (IRA): The Internal Revenue Service notes a traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible but are capped at a number declared by the IRS each year. The IRS notes that earnings and gains in a traditional IRA typically are not taxed until the funds are withdrawn.
Roth IRA: The IRS notes that a Roth IRA is another type of tax-advantaged savings plan where contributions are not deductible but qualifying distributions may be tax-free. Contributions to a Roth IRA also are capped.
Payroll deduction IRA: A payroll deduction IRA requires an employee to open a traditional or Roth IRA and then authorize a payroll deduction to deposit money into the account. Contributions to these types of accounts are capped and are exclusive to employees. Employers have no filing requirements.
401(k): A 401(k) allows workers to contribute a portion of their earnings to individual accounts before the money is taxed, which encourages people to save for retirement early on and lowers their tax liability while working. A 401(k) also allows employers to contribute to the account based on employees’ elective deferrals.
These are by no means the only retirement investment vehicles workers can use to save for retirement. Certain types of workers, including government employees and educators, have other options to save for retirement that are exclusive to them.
