Retirement Account Basics

By Michael Reilly on November 18, 2017

image via shutterstock.com

As a college student, there’s probably a good chance the thought of saving for retirement is one that has never even remotely come close to crossing your mind. Understandably, your thoughts are probably much more focused on even getting a job to retire from.

However, many experts say it’s important to start saving as soon as possible. According to an article on money.cnn.com, an ideal time to begin saving is after graduation when you begin receiving paychecks from your first job. The article really stresses the concept of the earlier you begin saving, the better.

Of course, your first step to saving for retirement would be to open a retirement-oriented savings account. A great option for this would be to look into opening a Roth IRA account.

Basically, a Roth IRA is a retirement account that offers tax-free growth potential. The money is taxed when you first put it into the account, however, the money you withdraw from it is not taxed. This differs from more traditional tax-advantaged retirement plans which typically grant a tax reduction for money placed into the account. Because of the Roth IRA’s method, interest gains from the account are tax-free.

To take a deeper look at the ins and outs of how a Roth IRA account works check out this article on moneyunder30.com.

If you want to go a more traditional route with your retirement plan, you’ll seek a job that offers a traditional 401k or Roth 401k plans.

With a traditional 401 k, you get a number of choices for investment options and any contributions and earnings from those investments are tax-deferred. These taxes get paid when the savings are withdrawn. Another benefit of this account is that most employers will match a portion of the accounts contributions which are also tax-deferred until withdrawn.

A Roth 401k plan differs from the traditional in that the contributions are not tax-deferred but are instead made with after-tax dollars. This makes the income the account earns through interest, dividends, or capital gains tax-free.

To help get a clearer understanding of the rules and regulations that come along with these accounts, take a look at this page on investor.gov

However, if you come across the opportunity to have an employer-sponsored retirement plan you should also still consider opening a Roth IRA as well. One of the most significant reasons for this is tax diversification. It’s important to pay attention to the IRS’s maximum annual contribution which applies to both accounts.

The advantages and benefits of this concept of double dipping are drawn out and explained in this supermoney.com article.

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