A Girl’s Guide to Retirement
What’s a 401(k) really?
The retirement system is confusing at first sight. I am convinced that until you’ve gone through the process or had someone nice break it down for you, you probably don’t understand the nuances of the different accounts.
As a newly minted graduate and soon-to-be working adult, I’m also navigating the space and wondering if I’m already supposed to know how retirement accounts work.
Since I didn’t know how the system worked, I identified some key retirement accounts and how they work in this article.
Accounts Overview
There are a lot of different types of retirement plans. I’ll focus on 3 primary retirement accounts:
- Individual Retirement Arrangements (IRAs)
- 401(k)s and 403(b)s
- Social Security
One of the reasons that there are so many accounts is that it’s rare for just one source to completely supplement one’s income in retirement. However, together each of these accounts can add a significant contribution.
To learn exactly how much you would want in retirement savings, have three times your salary by 40, eight times your salary by 60, and 10 times by 67.
Glossary:
- Deductible Contribution: Deductible contributions mean that any amount paid into a plan is a deduction from your income for tax purposes.
- Tax Advantaged: A type of account that provides tax benefits, such as tax deductions, tax deferrals, and tax-free income.
- Required minimum distributions (RMDs): Minimum amounts you have to withdraw from your retirement accounts each year after a particular age.
IRAs
Overview: IRAs are tax-deductible investments that enable you to make tax-deferred investments for your retirement.There are two primary types: a Traditional IRA and a Roth IRA.
How it Works:
- Who Can Contribute: You can contribute to a Traditional IRA if you have taxable compensation. With a Roth IRA, you can contribute if you have taxable compensation AND your modified adjusted gross income is below certain levels.
- Deductible Contributions: Traditional IRA = Yes. Roth IRA = No.
- Contribution Amount: For 2023, $6,500 if you’re younger than 50.
- Withdrawal Time: You may have to pay an additional 10% tax for early withdrawals for either type of IRA. For Traditional IRAs, you can start at 59.5 and you have to start taking distributions once you turn 72. It’s not required if you’re the original owner.
- Taxable Withdrawals and Distributions: Roth IRAs are usually pre-tax, meaning you pay taxes on what you put in. Traditional IRAs are post-tax, meaning you pay taxes on earnings from your traditional IRA when you withdraw.
Technically, you can contribute to both types of accounts as long as your total contribution doesn’t exceed $6,500, or whatever the particular annual limit is that year.
Choosing which one to invest in right now is a personal decision and a lot has been written to help people choose. Some notable factors I thought were interesting are:
- If you expect your future marginal tax rates to be higher than your current tax rates, then consider making a contribution to your Roth IRA since the dollars you contribute now will be taxable at lower rates.
- Roth IRAs are also not subject to RMDs, which is great if you don’t need retirement income from your IRAs.
401(k)s and 403(b)s
These fun names come from their respective defining Tax Code sections.
Overview: According to Investopedia, both plans are tax-advantaged retirement savings plans typically sponsored by employers. 401(k)s are offered by for-profit companies, and 403(b)s are offered by government and non-profit employers.
How They Work:
- Who Can Contribute: You and your employer can contribute to this account. Employers also often match contributions on behalf of the employee.
- Deductible Contributions: Yep
- Contribution Amount: For 2024, the contribution limit was $23,000 for workers under 50.
- Withdrawal Time: Since both of these accounts are intended to be used for retirement savings, you do pay an additional 10% penalty if you withdraw before 59.5. You must start taking RMDs when you are 73.
- Taxable Withdrawals and Distributions: Both are pre-tax accounts and the money then grows tax-deffered. Employees still pay income taxes on it when they withdraw it during retirement.
Also, your retirement accounts can be carried over! Ask your HR and don’t just keep putting it off, especially if you’re in your job-hopping era.
Social Security
Overview: A monthly check by our government that helps supplement our retirement plans. Pretty much every American worker that pays Social Security taxes earns “credits” towards benefits and you need a certain number of credits to get any retirement benefits.
The downside with social security is that it isn’t a lot. It likely won’t cover your entire income so use it in tandem with other sources of income. However, the amount of benefits you get also depends on how much you earn while working, so higher earnings = higher benefits.
You can start receiving your Social Security retirement benefits at 62, but you’ll be able to receive your full benefits when you reach your full retirement age. If you delay taking benefits up to age 70, your benefit amount will increase.
Final Thoughts
There are many ways to contribute to your retirement, including your traditional brokerage accounts and savings accounts. However, the accounts highlighted are geared towards long-term, wealth-building assets for your retirement.
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