Retirement Planning 101
Retirement savings accounts are a crucial tool in planning for retirement. The two most popular types of retirement accounts are 401(k)s and IRAs.
A 401(k) is an employer-sponsored retirement plan that allows employees to contribute a portion of their salary to a tax-deferred investment account. This means the money is not taxed until it is withdrawn from the account. Many employers also offer matching contributions up to a certain percentage of the employee's salary. The contribution limit for a 401(k) is $19,500 in 2021, and individuals over 50 can contribute an additional $6,500.
An IRA is a retirement account that can be opened by anyone, regardless of employment status. There are two types of IRAs: traditional and Roth. A traditional IRA allows individuals to contribute pre-tax income, which reduces their taxable income for the year. The contributions and earnings are taxed when withdrawn during retirement. A Roth IRA, on the other hand, allows individuals to contribute post-tax income, so withdrawals during retirement are tax-free. The contribution limit for IRAs is $6,000 in 2021, and individuals over 50 can contribute an additional $1,000.
When deciding which retirement savings account to use, it is important to consider factors such as your income, tax bracket, and employer contributions. A financial advisor can help you determine the best option for your financial situation.
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