Starting to really look into my retirement, and trying to figure out the baseline differences between these:
401(k)
Traditional IRA.
Roth IRA.
SEP IRA.
Simple IRA and Simple 401(k)
Solo 401(k)
My company provides a basic 401(k) that I never put much thought into, just set an amount monthly to contribute and that was that.
In: 15
Generally, your best bet would be to contact your employer and see if they offer a training course. Most will around the time of benefit enrollment, often around the end or start of the year. You could also contact the brokage that provides your 401(k) as they often have financial advisors that are included with the 401(k) plan for limited usage.
For the most basic, and common, types, there are two axis: 401(k) versus IRA and Traditional versus Roth. All four permutations are valid and reasonably common. All of the variations have you investing in the stock or bond market in various investments from money you put into the account.
A 401(k) is provided by your employer where you put money into the account, often with the employer putting some in as well, typically in the form of a match (eg, if you put in 5% of your wages, the employer will put in 4%). Most will offer a “target year” fund that is designed to be a decent investment vehicle for people looking to retire around the specified year. Most will also have a number of other investment options that go well beyond an ELI5 level – this is where talking with a financial advisor is required.
An IRA is opened by you directly with a brokerage and almost always has no connection to your employer. Generally, you can invest the money in an IRA into any investment available on the general markets, meaning stocks, bonds, and mutual funds. Again, the details of the investments go well beyond the ELI5 level.
Traditional versions of them have you pay no taxes on the contributions now or as you trade the funds around, however you pay taxes when you withdraw the money.
Roth versions have you pay taxes on the contributions as you make them, but you pay no taxes at any later time.
Both have their advantages and disadvantages, and you often want some degree of mixture of the two types. As with the investments, the details here go well beyond ELI5 level.
All types of accounts additionally provide some protection from creditors and bankruptcy. Notably, outside of fraud or illegal activity, the money in the accounts is not considered during debt collection or bankruptcy proceedings until you actually willingly withdraw it.
In exchange for the tax benefits and legal protections, you generally cannot withdraw the money until you reach a certain age or meet certain other conditions (eg, disability) without paying a fairly steep tax penalty *on top* of whatever taxes you’d normally need to pay on the money.
You can typically contribute to both a 401(k) and a Roth IRA account if you have the money, though contributions to a Roth IRA phase out at high income.
Now, onto the more uncommon types of retirement plans:
SEP IRAs are typically used by very small employers that are not large enough to warrant other types of plans, but still want to provide a retirement benefit to multiple employers. They are simpler and cheaper than the other types of employer plans, but require the employer to make identical contributions to all employees and the employer cannot have any vesting schedule. Employees cannot directly contribute to a SEP IRA – only the employer can, so employees are likely to also have a normal IRA as well.
SIMPLE IRAs are good for small employers, with a legal limit around 100 employees. Like a SEP IRA, SIMPLE IRAs are much cheaper and easier for an employer to setup than a 401(k). Like a 401(k), employees can contribute to the account and employers can have varying contributions between employees, though the variation much be tied to wages paid.
Solo 401(k), which also goes by a few other names, is a 401(k) plan for self-employed people or those owning a business with only themselves as an employee. These are much easier and cheaper to setup and run than a normal 401(k), and also allow the person to contribute additional money tax-free than just having an IRA.
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