Retirement accounts offer the means to save for retirement, that period of life when you can stop working and rely on your savings to fund your spending needs. There are many retirement account options, and each can provide you with a wide range of saving opportunities to save money while reducing your tax obligations.

What Is a Retirement Account?

A retirement account is a way to put money aside to pay for your retirement years when you no longer want to work. There are two things to consider here.

• Retirement accounts can be any savings plan you put in place to put money aside for retirement.
• Some retirement accounts – though not all – are tax-advantaged. That means that if you put money into qualified accounts and keep it there until you reach the required age, you can benefit from significant tax savings.

Because tax-advantaged retirement accounts can be rather lucrative, most people should consider putting them in place as soon as possible. That means opening up an account and starting to fund it with deposits as quickly as possible (even with your first job). The sooner you do so, the more money you will put away in the least amount of time.

Types of Retirement Accounts

A challenging issue for most people is choosing the best type of retirement account for their needs. There are many options, but the following are some of the most common.

Individual Retirement Arrangements (IRAs)

IRAs are the most common option for those looking to set up a retirement account for themselves. These types of accounts come in several forms:

• Traditional IRAs: In this plan, the contributions you make to the plan are tax-deductible. That means you put money into the account before paying taxes.
• Roth IRAs: This type of IRA allows you to put money into the account after you have been taxed, such as by your employer. You do not pay taxes when you take distributions from the account later.
• SEP: A Simplified Employee Pension is a type of IRA that is set up by an employer. The employer makes payments directly to the IRA for each employee.
• SIMPLE IRA: This type of plan is designed to allow employees to choose between a reduction in their salary that goes to fund the IRA. Employers can make contributions as well.

401(k) Plans

Another type of retirement account is a 401(k) account, which is often the most commonly used option for those who have an employer set up their retirement account. In some situations, the employer will match a certain amount toward the retirement account up to a certain amount. The funds go into this account pre-tax, and you are taxed on them when you withdraw them during retirement.

Other retirement accounts exist, such as defined benefit plants, 457 plans, and profit-sharing plans.

When Should You Use a Retirement Account?

It would be best if you started using a retirement account right away. That is because the sooner you start contributing to your account, the more time interest has to compound or build on itself. You can start contributing to a retirement account with your first job if you would like to do so. If your employer does not offer one, you can turn to a local bank or credit union to set one up or work with a financial planner to help you with the process.

Key Retirement Account Terms

There are several terms to know about these accounts, such as:

• Contribution limit: This is the highest amount you can deposit in your account to receive tax benefits.
• Tax deductible contributions: This tells you if the contributions you make during your working years are tax deductible.
• Minimum distribution age: This is the youngest you must be to start deducting from the account.
• Tax-free distributions: This term describes whether the distributions – or payments – from the retirement account are tax-free when you retire.
• Employer matching: Some employers will match the contributions you make to your account, helping you to build its value over time.

Evaluating Different Retirement Accounts

You should know the retirement account rules before you decide to open one. These will differ between retirement types and the organization offering them. Some of the most common factors to keep in mind when choosing retirement accounts include the following:

• Is your employer offering one? If the employer sets them up, you may pay lower fees to manage your retirement account.
• Will your employer make contributions to your plan? If so, that’s going to help you to increase the amount you are saving with each paycheck, allowing you to grow your retirement account faster.
• Do you think you’re tax rate will be higher now or after retirement? For example, most people pay higher taxes during their lifetime and less during retirement because they fall from the highest tax brackets (when they retire). You’ll want to choose a retirement account that offers the biggest advantage to you – if you want to be taxed on these funds at a lower rate like during retirement, choose a Roth IRA.
• What income restrictions or limitations apply to you? The IRS has several restrictions on how much you can put away for retirement each year and receive a tax deduction. This varies based on things like the type of retirement account as well as your age.
• What type of underlying securities are offered? Retirement accounts grow in value based on how well the underlying securities on the accounts do. Research what is being included as the types of investments so you know what to expect.

Retirement accounts are a valuable tool most people will benefit from if they start them early. Learn more about how these accounts can help you.