The 3 Most Common Retirement Accounts

Retirement might be years away for you or you could have retired years ago. In either scenario, odds are you’ve spent time thinking about where your income is going to come from in retirement. On average, Social Security will replace about 40% of your annual pre-retirement earnings. Although this can vary based on each person’s circumstances. And that’s from the Social Security Administration. So how do you make up the difference if Social Security is only going to make up about 40% of your pre-retirement earnings? Today I’m going to focus on the three most common types of retirement accounts and where people pull income from their investments in retirement. The first that I’m going to talk about is work retirement plan. So this could be a 401K or 403B. It could be a Thrift Savings Plan if you’re a government employee. Some pros with these are obviously provided by your employer. Funded by your employer. You can contribute pre-tax to either of these plans that I’ve listed. Also for many employers, they will provide a match. So that just magnifies how much money is going in there and helps you invest more through that employer plan. Second is the personal retirement account options that you have out there. So that could be your IRA, your individual retirement account or your Roth IRA. Those are accounts that you can set up on your own and contribute to. And I will get into it a little bit more, the tax implications of all of those. And then the third option that you see used a lot is a brokerage account. So a brokerage account is an account that you can set up outside of your typical retirement accounts being your work retirement accounts or your individual retirement accounts. A brokerage account is an account you set up, you contribute to and you can invest and select from a whole host of different types of investments whether that’s mutual funds or exchange traded funds or even individual stocks and bonds. So those are three of your options and I mentioned earlier that I was going to touch on the tax implications and how that might impact you in retirement. So the first situation is your work retirement plan. So with a 401K or 403B, those are two of the most common for work retirement plans. You can contribute money to that plan. Most people do that pre-tax and their employer also may contribute. When you retire and take money out of that plan, you are going to pay ordinary income tax on all the money that is put in there. The exception to that would be if you put money in a Roth 401K or Roth 403B. So post-tax money went in from you. And then in retirement that would come out tax-free. With personal retirement accounts, you have the individual retirement account or the Roth IRA. The IRA works very similar to a 401K and 403B. You put money in there pre-tax. You get a tax break in the year potentially, if you put the money in. And then in retirement it comes out tax-free. The Roth IRA, you put that in post-tax. It comes out then in retirement tax-free. And then on the brokerage account, with the brokerage account what’s unique there is you can put as much really, as you want into it. And then when you take money out, it is hit with capital gains tax on the gains specifically. If you’ve held investment for less than a year, that short-term capital gains. If it’s been longer than a year, that’s long-term capital gains. So I spent a few minutes here now discussing the three most common types of retirement accounts. But what I want to talk about now is the why? Why are these important and what should you do about this? And how can these potentially help you? I want to stress it’s very important that you understand how these three accounts work. How they could impact your specific financial situation. What the tax implications are for you both now and in the future. Because ultimately, this could be a huge source of income for you in retirement to supplement what you’re receiving from Social Security. It can be stressful to try and weight the pros and cons of all these on your own. And when you sit down, you may have questions that you don’t know the answers to. We’d be happy to meet with you. One thing that we really enjoy meeting with our clients is to take a detailed approach through a plan and review all of the different options. What are their expenses? What are their income needs? So that we can drill down to find the best for you to save for retirement. So when you think about these different types of accounts, if you do have questions. If you have concerns like hey, I don’t know, you know should I take advantage of my company match at work? Or should I set up an IRA or a Roth? Should I use a brokerage account? You have all of these different options available to you. We here at Centennial Wealth Advisory would love to sit down with you and we would love to just be able to help you plan to retire well.